Harvard loses $US1.25b on debt gamble

Harvard University, the world's richest college, lost $US345.3 million ($367.8 million) terminating interest-rate swaps last year, bringing its cost of unwinding debt derivatives since 2008 to more than $US1.25 billion.

Harvard University, the world's richest college, lost $US345.3 million ($367.8 million) terminating interest-rate swaps last year, bringing its cost of unwinding debt derivatives since 2008 to more than $US1.25 billion.

Harvard made the most recent payments to exit derivatives linked to about $US942 million of existing and future debt, the Cambridge, Massachusetts-based university said in a report on the fiscal year ended June 30.

Harvard agreed to pay more than $US900 million in 2008 to exit swaps linked to an ambitious expansion plan in Allston, a Boston neighbourhood near the main campus. The use of the derivatives backfired at the same time the university's endowment was on pace to lose more than a quarter of its value. Since then, the school has raised cash and cut debt to stabilise its finances.

"Like most colleges and universities, we already have exhausted the easiest opportunities for budget improvement," Daniel Shore, Harvard's vice-president for finance and chief financial officer, and treasurer James Rothenberg said in the report. "As a result, we will face increasingly complicated yet unavoidable choices as we seek to cover more ground in cost management."

The school agreed to many of the swaps when former president Lawrence Summers was planning to build the Allston campus, including a $US1 billion science centre. The swaps, which locked in interest rates for Harvard, also required the school to post collateral if rates fell. Harvard officials said that the hedges on debt that remain are unrelated to Allston.

After Drew Faust succeeded Mr Summers as president, the school terminated swaps to avoid posting millions in collateral.

Ms Faust put the expansion plan on hold as Harvard's frayed finances forced the school to take budget-cutting measures, including cutting some student services.

The school's losses on terminating the swaps since 2008 were $US497.6 million in fiscal 2009; $US277.6 million in 2011; and $US134.6 million in 2012.

Ms Faust has since resumed the building plan, and the school is shifting its construction financing from debt to donations.

Bloomberg