Credit Crisis, Recession and Higher Education

December 5, 2008Presented by: Roger GoodmanVP & Team LeaderMoody’s Higher Education & NFP Teamroger.goodman@moodys.com(212) 553-3842

2

Overview of Moody’s U.S. Higher Ed Portfolio:More than 550 Ratings; $125 Billion Rated Debt

Private N.F.P. Higher Education: 300 issuers & $50 bill. debt Median rating of A3 Ratings cover 70% of enrollment Ratings cover 20% of institutions Many additional credit-enhanced LOC ratings

Public Higher Education: 200 issuers & $75 bill. Debt Median rating of A1 Ratings cover 95% of enrollment Ratings cover 90% of 4-year colleges, universities & systems

Community Colleges: 60 issuers & $1 bill. Debt Many issuers finance with tax-backed debt rated by LG teams Joint analysis with local government analysts

33

Ratings Approach:Six Key Rating Categories

Student Demand

Financial ResourcesOperating

Performance

Management and

Governance

Capital Needs,

Debt and

Other Liabilities

Legal Structure

4

So Much Has Happened…

Lehman Bankruptcy

Bond Insurer downgrades

Bear Stearns rescue

Merrill Lynch merger/rescue

Citigroup bailout

AIG bailout

Unemployment spiking

$700 B rescue plan

Election

Washington Mutual rescue

Foreclosures spiking

Home values declining

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What issues relate to Higher Ed…

Changing Demographic Environment Flat Federal Research Funding Increasingly Complex Debt & Investment Strategies

Have hedge funds lived up to expectations Are liquid funds really liquid? What are risks of debt portfolio, esp. variable rate structures

Growing Governmental Scrutiny & Risk of Increased Regulation Wealth Concentration Continues, Driven by Superior Fundraising and

Investment Returns Credit Markets Tighten for Higher Ed Borrowers, lack of enhancement

providers Student Loan availability stressed Family wealth and ability/willingness to pay newly strained by loss of home

equity in addition to stock market losses

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Separate the Short & Long-Term Issues

Source: Moody’s.com

Short-Term Capital Market

Freeze Variable rate

market disruptions Lack of market

access to issue new debt

Liquidity impacts Commonfund freeze Potential for

Problems with Hedge Funds

Long-Term Economic impact on

tuition pricing and affordability

Strategic and Facilities Planning

Investment loss impact on endowment spending

Philanthropy under pressure

7

Capital Markets Frozen but Thawing?

Source: Moody’s.com

Fixed rate debt was unavailable; issuance growing Variable rate market highly volatile

How Tight Will Capital Market Access Be for Colleges?

0

20

40

60

80

100

120

140

160

5-1-

989-

10-9

8

1-21

-99

6-3-

99

10-1

4-99

2-24

-00

7-6-

0011

-16-

00

3-29

-01

8-9-

0112

-20-

01

5-2-

029-

12-0

2

1/23

/200

36/

5/20

03

10/1

6/20

032/

26/2

004

7/8/

2004

11/1

8/20

043/

31/2

005

8/11

/200

512

/22/

2005

5/4/

2006

9/14

/200

6

1/25

/200

76/

7/20

07

10/1

8/20

072/

28/2

008

7/10

/200

8

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Baa-Aaa Spread 7 Day VMIG Composite

8

Changes in Capital Markets and Debt Structures?

Greater differentiation of credit quality Increased demand for security features by investors Rapid increase in use of letters-of-credit and short-term

debt; new issue (rather than restructurings) likely to be fixed Periodic shutdown of fixed rate markets Slow-down in capital spending plans

9

Formerly Hidden Risks of Variable Rate DebtCurrent conditions have brought these to the forefront

Financial Covenants

Renewal/Rollover Risk

Collateral Posting

Rating Triggers

Probability

Mag

nitu

de

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Growing Concerns About Liquidity

Commonfund Short Term Fund Money market funds “breaking the buck”, halting

redemptions Increased pace of capital calls coupled with slowed

distributions from private investments Reduced cash balances and decisions to invest working

capital “alongside endowment” Reduced access to bank/external liquidity? Cash flow problem from student loan disruption?

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Remained Strong in Prior Recessions; Is This Cycle Different? Net worth losses already larger than 2000-2002 Liquid wealth decline at same time as home equity loss Borrowing capacity reduced

Student Lenders & Home Equity Political constraints tighter than economic constraints

Percent Change in Household Net Worth

-15%

-10%

-5%

0%

5%

10%

15%

'01 '02 '03 '04 '05 '06 '07 CurrentProjection*

Source: Moody’s Economy.com; Federal Reserve

Will Higher Ed Hit a Tipping Point in Pricing?

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Investment Losses are Large, but LT Impact More Muted Will Hedge Funds & Mgmt Live Up to Expectations? First major test since wave of higher ed investment

Much greater volatility than typical Forced de-leveraging in some cases at wrong time Will liquidity of investments meet expectations

Will cuts be made to meet spending policies? Or did management control growth in up years?

Even Substantial Declines in FY2008 and FY2009 Mostly Match Gains of Recent Years

$152,615$176,670

$195,050$214,634

$251,913$226,722

$158,705

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

2003 2004 2005 2006 2007 FY2008 Projected(Down 10%)

FY2009:Additional 30%

Decline

Med

ian

Cas

h an

d In

vest

men

ts

Source: Moody’s.com

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Philanthropy Expected to Feel Some Pressure Finance industry hit particularly hard in this cycle compared to prior downturns; drop in fundraising may result

Source: Moody’s Economy.com and Giving USA

Growth in Giving to Education Flattened in 2001-03; Will Likely Fall in 2009-10

-4%

0%

4%

8%

12%

16%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Actual Estimated

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What to Do? Revisit Risk Management Approach

Does Board understand debt structure?Who are your corporate partners?

Are they diversified?What would impact of mergers, bankruptcies, etc. have on the institution?

Plan conservatively and Measure ResultsHas management planned conservatively for enrollment, tuition and financial aid?Do you know how many requests for additional aid your financial aid office has received?Have you identified areas of potential cutback if necessary?

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What to Do? Don’t Take Liquidity & Market Access for Granted

READ DOCUMENTSWho are your corporate partners?

Are they diversified?What would impact of mergers, bankruptcies, etc. have on the institution?

Build TransparencyDo students and families truly understand financial aid options?

Answer is NOInform investors in your bonds

Higher Ed Accounting is very opaque

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What to Do? Maintain investment diversity and rational liquidity

Not only by asset class, but by managerConsider what is given up in alternative investments

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What to Do? Don’t Panic (ie. Why aren’t we downgrading everybody?)

Great Business ModelHow Paid, Subsidies, Capital Needs, etc.

Underlying Demand is Strong and Resilient, if not Counter-cyclicalStrengthened tremendously in last decade; room to weakenAbility to slow capital investmentMost cases, room to reduce expenses

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Questions and Answers

Contact:Roger GoodmanVP & Team LeaderMoody’s Higher Education & NFP Teamroger.goodman@moodys.com(212) 553-3842