Sunday, December 21, 2014

Debt ‘swaps’ avoid risk, save money

From page A6 | January 11, 2013 |

By Peter Taylor

The University of California has come under criticism for its finance decisions — specifically three interest rate “swaps” made on funds borrowed over the past 10 years to expand university medical centers.

Swaps exist to insulate borrowers such as UC from volatile interest rates. They work like this: The university borrowed money at a variable interest rate, with the payments rising and falling with interest rates. It then swapped those payments for payments at a fixed rate. Thus, if the interest rate rises, then the university pays less than it would have if it had stayed with the original loan. But if the interest rate drops, as it has, then the university pays more.

Like any public institution, UC must not have too much exposure to rising interest rates or it risks coming up short for expenses. We are not in the business of gambling with funds entrusted to us by taxpayers, students and parents, and patients in our hospitals.

But these critics unwittingly advocate that UC do just that. A group of sociology graduate students recently published a report that suggests the UCLA medical center would have been better off if we had taken unhedged variable rate risk on a 2007 bond sale. They further suggest that canceling our existing swap and leaving us with a floating rate would somehow benefit the medical center — at the time when the health care industry is facing an uncertain future.

At present, floating rate debt looks like a bargain because interest rates are at record lows. But history teaches that floating rates go down and up — and when rates go up, the cost can be hazardous to a university’s health. In fact, the bond issue for the UCLA medical center matures in 2047, and these graduate students suggest we remain unhedged until then. Perhaps they possess a crystal ball that shows the future of interest rates?

UC has followed a conservative approach to fund capital and uses two tools to do so: fixed-rate bonds and floating rate bonds swapped to a fixed rate. It’s the latter that the students misunderstand. They make a classic beginners’ error of comparing the fixed rate paid on the swaps with floating rates. The proper comparison is between the two choices that the university did weigh: getting to a fixed rate with a swap or with traditional fixed-rate bonds. UC has used swaps only when the advantage is significant. When this comparison is done correctly, it shows that UC has saved more than $40 million through the life of the bonds through swaps.

The students who have criticized these decisions insinuate that our costs would have been lower had we issued more variable rate debt. But do they point out that since 2008 the credit rating agencies have made it much harder to issue variable rate bonds? Do they calculate the cost of a ratings downgrade because of too much interest rate exposure?

UC actively manages its debt to keep costs low. Since August 2011 alone, we have refinanced $1 billion of existing bonds to save $170 million in future debt payments. And when we do choose to execute swaps, the swap policy adopted by the Board of Regents in 2011 is as carefully constructed as any in higher education throughout the nation.

As much as I love Shakespeare, I don’t pretend to be qualified to teach a class on his works. Similarly, the students who have criticized the university’s policies should understand that just because they are in graduate school doesn’t mean they are experts in everything. Their miscalculations are outrageous. Indeed, if this level of “research” were produced for a class on finance, it would merit an “F.”

— Peter Taylor is the chief financial officer in the University of California Office of the President.



Special to The Enterprise

  • Recent Posts

  • Enter your email address to subscribe to this newspaper and receive notifications of new articles by email.

  • .


    What’s new at UCD? Construction projects abound

    By Tanya Perez | From Page: A1 | Gallery

    No-nonsense Musser voted Citizen of the Year

    By Dave Ryan | From Page: A1 | Gallery

    Sharing a meal, and so much more

    By Anne Ternus-Bellamy | From Page: A1 | Gallery

    Brinley Plaque honors environmental stalwart

    By Dave Ryan | From Page: A1 | Gallery

    AP sources: Cops’ killer angry over Garner death

    By The Associated Press | From Page: A2

    Raul Castro: Don’t expect detente to change Cuban system

    By The Associated Press | From Page: A2

    Police seek help in finding runaway twin girls

    By Enterprise staff | From Page: A2

    Downtown crash results in DUI arrest

    By Lauren Keene | From Page: A2

    March trial date set in Davis molest case

    By Lauren Keene | From Page: A2

    North Korea proposes joint probe over Sony hacking

    By The Associated Press | From Page: A2

    Luminaria display planned in West Davis

    By Enterprise staff | From Page: A3

    Soup’s On will benefit NAMI-Yolo

    By Enterprise staff | From Page: A3

    Pedal around Davis on weekly bike ride

    By Enterprise staff | From Page: A3

    Donors, volunteers honored on Philanthropy Day

    By Special to The Enterprise | From Page: A3 | Gallery

    Supplies collected for victims of abuse

    By Enterprise staff | From Page: A3

    Enterprise plans Christmas, New Year’s holiday hours

    By Enterprise staff | From Page: A3

    Surprise honor is really nice, dude

    By Enterprise staff | From Page: A5 | Gallery

    Konditorei presents free holiday concert

    By Enterprise staff | From Page: A5



    E-cigs surpass regular cigarettes among teens

    By The Associated Press | From Page: B4

    Google me this: Should I hit that button?

    By Marion Franck | From Page: B4

    Too late to pick a fight

    By Creators Syndicate | From Page: B5

    All police need to humanize

    By Letters to the Editor | From Page: A10

    Are we only a fair-weather bike city?

    By Letters to the Editor | From Page: A10

    Join us in making our world more just

    By Special to The Enterprise | From Page: A10

    Tom Meyer cartoon

    By Debbie Davis | From Page: A10

    The electronic equivalent of war

    By Special to The Enterprise | From Page: A11

    The Green House effect: Homes where the elderly thrive

    By New York Times News Service | From Page: A11



    Stenz shines as DHS girls take a tournament title

    By Enterprise staff | From Page: B1 | Gallery

    Aggie Manzanares not quite finished carrying the rock

    By Bruce Gallaudet | From Page: B1 | Gallery

    UCD women look to improve, despite game at No. 7 Stanford

    By Bruce Gallaudet | From Page: B1 | Gallery

    Second-half run spurs Aggie men to 8-1

    By Enterprise staff | From Page: B1

    49ers fall to San Diego in overtime

    By The Associated Press | From Page: B10







    Marrone Bio expands its product reach in Latin America

    By Enterprise staff | From Page: A4

    Sierra Northern Railway names CEO

    By Special to The Enterprise | From Page: A4

    Sink your teeth into Vampire Penguin

    By Wendy Weitzel | From Page: A4 | Gallery





    Comics: Sunday, December 21, 2014

    By Creator | From Page: B8