Harvard: When Interest Rate Swaps Go Sour

(November 11, 2013) — Harvard University has spent more than $1.25 billion unwinding debt derivatives since 2008, according to its own figures.

The most recent payments to exit the interest rate swaps were linked to around $942 million of existing and future debt, the Cambridge, Massachusetts-based university, which has an endowment of $30 billion, said in a financial report.

The majority of the swaps, which assumed that interest rates would rise, were taken out in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university.

These “forward” swaps provided a fixed rate before the bonds were actually sold, enabling them to exchange their interest rate payment periods. Forwards cost nothing up front, but required the university to post collateral in the event that interest rates fell—which they did.

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The situation became so bad that the school was forced to borrow money in 2008 to terminate some of the swaps.

The costs resulting from unwinding the derivatives were $497.6 million in fiscal 2009; $277.6 million in 2011; and $134.6 million in 2012, according to a Bloomberg report.

Harvard had an operating deficit of $34 million for the past year. This marked an increase from $7.9 million the earlier period, but was still a relatively small proportion of its $4.2 billion 2013 revenue.

In moves designed to stabilize its finances, the university raised holdings in cash and liquid investments outside its endowment to $1.5 billion from $1.3 billion at the end of the earlier the 2011 fiscal year, Bloomberg reported.

Outstanding debt fell to $5.7 billion from a high of $6.3 billion on June 30, 2011.

(November 11, 2013) — PensionDenmark has agreed an historic deal with an Abu Dhabi-based energy company to acquire 40% of a Dutch gas pipeline system for $240 million.

The agreement, made with TAQA for a stake in the network owner Noordgastransport (NGT), marks the latest in a line of energy infrastructure investments for the Danish pensions powerhouse, having already invested in biomass facilities and wind farms.

PensionDanmark has DKK 9 billion ($1.63 billion) directly invested in infrastructure and expects to invest a further DKK 9 billion ($1.63 billion) during the next four years, most of which will also be in energy-related infrastructure.

“This investment is attractive because it generates an attractive inflation linked return with a very low correlation to the business cycle and PensionDanmark’s other investments in equity and fixed income, which is the whole idea of this type of investment,” said Torben Möger Pedersen, CEO of PensionDanmark.

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NGT consists of approximately 470 kilometres of offshore pipelines that carry gas from the Dutch sector of the North Sea to a treatment terminal on the north coast of the Netherlands, from where it is distributed through the Dutch gas network.

The transaction is still waiting EU approval, but the parties said they fully expected it to go through.

PensionDanmark manages labour market pensions under collective and corporate agreements on behalf of 637,000 members in 27,000 businesses within the private and public sectors in Denmark.

Energy is proving to be a popular investment for Danish pension funds. National fund ATP and PFA Pension, Denmark’s largest commercial pensions company, bought new shares worth DKK2.2 billion ($400 million) and DKK800 million ($144 million) respectively in local energy giant DONG in October.

Not all Danes are looking to the energy sector to fulfil their infrastructure mandates however: last month the IndustriensPension fund announced it would fund the construction—and operation—costs of the new radiotherapy unit at the Næstved Hospital.

The unit is due to open in 2015 and will cost DKK110 million ($19.8 million) to build. When it is completed, more than 10,000 more Danes will have access to cancer treatment.

“It is very satisfying that we know going into this public-private partnership can help to provide the citizens of the region better treatment,” said Laila Mortensen, CEO of IndustriensPension.

“The partnership makes it possible to construct a building of high quality and therefore lower operating costs. At the same time we ensure the 400,000 industrial workers [who save with us will have] stable returns over a long period, and have created Danish construction activity for the benefit of employment. All involved parties benefit from this partnership.”