Century Bonds: When Long Bonds aren’t Long Enough

by JT McGee

century bonds, MIT, fixed income, investingOne hundred years ago it was 1911. The Model T Ford was three years old, the dollar was still backed by gold, and the personal income tax had not yet been invented. It’s almost as hard to look back 100 years as it is to look forward 100 years, but the Massachusetts Institute of Technology says it can predict the future by issuing $750 million in century bonds, which have a maturity date 100 years into the future.

It’s unlikely that individual investors will be piling into super-long bonds any time soon–anyone reading this post will be long dead by the time the bond reaches maturity. But for a myriad of insurance companies selling anything from life insurance to pension guarantees, this bond is awesome.

100-Year Century Bonds from MIT

The markets priced the current issue with a yield of 5.6% annually, or 1.3% higher than the 30-year US Treasury, showcasing the market’s desire for long-dated yield.

MIT isn’t the only organization looking to maximize the benefit of a low interest environment. Google recently sold $3 billion in bonds, a first for the company, even though it holds nearly $37 billion in cash and short-term instruments.

The prospectus for the investment notes the Institute plans to make semi-annual interest payments, 200 in total, for 100 years. The bonds are callable, which indicates that MIT may take some of their long-term debt off the table.

In general, I find little reason why MIT might decide to call the bonds, especially since “make-whole” calls on long-term debt can be extremely costly in terms of using up cash-on-hand, and because bonds are often priced over comparable US Treasuries, which are being used to price this most recent transaction.

Shopping for 100-year Securities

Just for fun, I went to FINRA’s bond screener to look for corporate debt issues that were set to mature on or after 01/01/2090. There weren’t many, but all the issues were from global, recognized brands.

Previously issued century bonds of interest:

  • Walt Disney issued $300 million in century bonds in 1993 which are slated to mature in 2093. Back then, Walt Disney was willing to pay a coupon rate of 7.55% to borrow for 100 years. Investors have won big on this one!
  • Motorola issued 100-year century bonds at the turn of the century, and at the height of the tech bubble. They offer a 5.22% annual coupon rate, though the markets have priced in the company’s poor performance in recent years, selling the bond at a discount with a current yield-to-maturity of 7.565%.
  • Yale University raised $125 million without difficulty in 1996. The bonds trade at near face value.
  • MIT issued its first round of 100-year debt 15 years ago in 1996. Issued with a coupon of 7.25% per year, the market has since adjusted and the bonds sell at a premium with a current yield to maturity of 5.76%. Non-callable, MIT century bonds issued in 1996 might explain why MIT wants a call option in the recent offering.
  • Tribune Company, a newspaper and media conglomerate now working through bankruptcy, has proven that you can’t project 100 years into the future as easily as you can look into the past. The 100-year debt obligations sell at a 50% discount to face value, and offer investors more than 16% per year all the way to maturity. Good luck collecting outside of bankruptcy; we know now that newspapers aren’t as rock solid as they were once believed to be in 1997.

Coca-Cola, Norfolk Southern, Sherwin Williams, Ford Motor Corporation, Fedex, and even the People’s Republic of China (it’s all about the women) are among other organizations and institutions borrowing for 100 years.

In this fast-paced world, I don’t think I’d ever consider buying a century bond as an investment, even for a perpetual corporate investment entity. But where I don’t want to buy into the future with long-dated debt, there seems to be no shortage of investors willing to line up at the chance to own it.

For kicks and giggles:

corporate century bonds

Notes: This chart is worthless from a statistical perspective, but I like it. Outlier is a recent issue (2010) from Northfolk Southern. Cluster in 2097 is what we like to call a maturity wall of epic proportions. (Chart not worthless!)

If I had to make a 100 year wager

If I absolutely had to purchase one of the many century bonds up for sale, I would probably wager it on MIT for the following reasons:

  1. Serious financial backing –I can’t see the many multi-millionaires and billionaires that have come from MIT allowing it to go bankrupt should things go downhill. MIT had $1.6 billion in debt before this offering, but graduate David Koch of Koch Industries could probably shake enough money out of his couch to pay it off all in one go.
  2. MIT graduates make it happen – A 2009 Kauffman Foundation study found that MIT graduates have founded or currently run businesses with more than $2 trillion in annual sales. Just take a look at the list of most influential and successful people to have ever attended MIT. Insane!
  3. Unshakeable grip on education – I would venture to guess that everyone in the US has heard of MIT, and several hundred million, if not billion, also know of it. I can’t see MIT losing its status any time soon, and I suspect it will be just as important 100 years from now as it is today.

So what do you think? Would you go long with super long bonds? Do any of the companies offering 100 year debt interest you as an investor?

FYI: I’m now offering $100 billion in century bonds as a personal investment for you. Some 100,000 are now up for auction in $1 million units. Unlike other century issues, these will be zero-coupon bonds with a maturity 100 years into the future. Who wants to make me an offer? 😉

Update: Just a few hours after this post went up, Norfolk Southern announced its own $400 million century bond offering priced at 6%, a 175 basis point (1.75%) yield premium to 30-year Treasuries. Read the story at Bloomberg.

FAQ:

Q: Are there any century bond ETFs?
A: Not at this time. Because century bonds are sold in larger denominations ($1 million or more to institutional investors) the redemption and creation process would have to be done in $1 million lots. Instead, any century bond fund would have to be a closed-end fund (CEF). Institutions could keep it close to NAV with credit spreads and synthetic options, but it’d be too costly.

Q: Why would a company or government issue a 100-year bond?
A: Inflation is a borrowers best friend. If we assume that inflation is exactly 3% per year, every year, then a century bond with a $100 face value would have a net present value of $5.20. So, we know that having $100 in your hand a century from now is equal to having $5.20 today, assuming inflation is a constant 3% per year. In this low interest rate environment, that means MIT’s first coupon on its century bond will be equal to the entirety of the principle investment 100 years from now.

Q: When were the first century bonds issued?
A: The first bonds to sell with maturity dates 100 years in the future or longer were English Consol bonds, which were issued in perpetuity for infinite number of coupons. Issued for the first time in 1751, the present value after centuries of inflation is virtually zero, though they are still traded in some circles. Modern perpetual bonds are callable, often only after a period of 5 years has passed. Still, there is very little reason to call such a bond, as they are often issued with very low coupon rates.

Photo by:Venkatesh Srinivas

{ 10 comments… read them below or add one }

Dave @ Money In The 20s May 18, 2011 at 05:39

What discount are those zero-coupon bonds of yours selling at?? 🙂

I wouldn’t consider a century bond because of the ever changing landscape (as you noted with Tribune). If I did have to choose one, I would go with either Yale or MIT. Education is not going anywhere and those schools produce plenty of millionaires and billionaires that are very philanthropic.

Reply

JT McGee May 19, 2011 at 11:40

Tell you what, I’ll give you the whole lot for $100,000. Massive return, right there. 😉

Isn’t it amazing how newspapers went from rock solid to zero in a matter of years? Crazy, really. And I agree; MIT and Yale aren’t going anywhere.

Reply

LifeAndMyFinances May 18, 2011 at 06:06

This might be a cool gift for the grandkids (even though I don’t even have kids yet). But, at 5.5%, this investment should beat inflation, and will yield a pretty nice return after 100 years! 🙂

Reply

JT McGee May 19, 2011 at 11:41

Ha, yeah, exactly. The maturity date is so far out it’s hard to even comprehend–it would definitely be a gift for the grandkids (at least the principal, you’d still get the lovely stream of income!)

Reply

Hunter May 18, 2011 at 13:38

Excellent article. I love this stuff. I think 5.6% annual return may turn out to be very attractive compared to other major asset classes over the long-term, given the relative risk. As long as there is a viably liquid market, this would be an attractive product for forward looking CFO’s. I’ve heard of some Japanese companies having 200 year plans. This would be ideal for them too.

Reply

JT McGee May 19, 2011 at 11:43

Thanks for bringing up Japan; they have a very interesting society, economy, and financial market. Lots of low ROE companies, but hey, if you can borrow as cheaply as you can in Japan, it probably wouldn’t hurt to lock it in for 200 years. 😀

Reply

Robert @ The College Investor May 18, 2011 at 14:19

That is interesting. I have heard of long maturity bonds, and I think the UK even issued 500 year bonds once. You definitely only want to invest in those if the company/government is stable!

Reply

JT McGee May 19, 2011 at 11:45

Yeah, definitely. Thanks for bringing up the UK/Great Britain. I haven’t heard of the 500 year issues, but they have old bonds issued in perpetuity from centuries ago that are still paying. Of course, after inflation the few Pounds that they were issued for isn’t really worth noting from a financial perspective, but it’s definitely interesting from a historical perspective.

Reply

. May 25, 2011 at 08:13

What is it about low interest rates that makes century bonds so attractive to sell for borrowers like MIT? Also, at what interest rate would the MIT bonds be issued? is it 5.6% as stated in your article

Reply

JT McGee May 25, 2011 at 11:29

1) The best part about issuing a century bond is that the borrower is locking in some of the lowest rates in history for the longest amount of time possible.

2) Yes, they were issued at 5.6%.

Reply

Leave a Comment

*

Previous post:

Next post: