Wall Street Journal readers learned today that the State of California -- on behalf of the University of California system -- sold $860 million in taxable bonds. How does this deal affect current and future UC students, Golden State residents and investors?
What are the details of the UC bond issue?
The University of California sold $860 million in bonds to larger investors. These bonds will not mature for 100 years. The century bond yield is set at 4.858 percent, which is above the 30-year treasury rate of 3.208 percent. Among the bond buyers were hedge- and pensions funds as well as life insurance companies.
What does the UC Board of Regents intend to do with the proceeds?
At this time, the proceeds of the bond sale will be allocated for campus projects in Los Angeles, Berkeley and San Diego. The regents have the final authority in determining the allocation of the funds.
Is a century bond sale like this a rare occasion?
Not really; the California Institute of Technology sold $350 million in century bonds just last year. The yield at that time was defined at 4.744 percent.
Is the bond yield a great deal for investors?
It is debatable whether the 4.858 percent, which is 1.65 percentage points above the treasury rate, is really a very good investment. Market Watch points out that investors would have had the opportunity to cash in U.S. Treasury Notes with similar yields after a short 10-year wait just five years ago.
Why do these long-term bonds attract investors?
It is true that anyone involved in this financial deal will not be around to cash in the bonds when they mature. Investors do believe that the University of California will still be operational in a century. This faith in the school's longevity, coupled with the attractive yield, made the century bond offering quite eye-catching for long-term funds managers.
Is it possible for long-term bond deals to go bad?
Indeed, it is. The Financial Industry Regulatory Authority (FINRA) shows that the Tribune Company issued a century bond on May 15, 1997. The maturity date is Nov. 15, 2096. Although the coupon rate is fixed at 7.250 percent with an offer price of $99.61, the current sale price sits at $44. The problem here is the company's bankruptcy filing, as chronicled by Chicago Business. It is unclear which long-term plan there is for the Tribune Company, once it emerges from bankruptcy, whether it will remain a viable business, and whether or not bond holders can collect on the century bonds after bankruptcy. Comparing and contrasting this to the University of California century bond issue, consider the possibility that the school may be out of business or the state unable to repay the principal in 100 years.
Sylvia Cochran is a Los Angeles area resident with a firm finger on the pulse of California politics. Talk radio junkie, community volunteer and politically independent, she scrutinizes the good and the bad from both sides of the political aisle.
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