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Credit Ratings In Higher Education
Presented by:
Roger Goodman
Vice President and Team Manager
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Agenda
1) Moody's Overview, Portfolio Overview, Background on Ratings
2) Rating Process
3) Key Debt Structuring FAQ's
4) Non-Traditional Financing/P3s
Moody’s Background
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InvestorsInvestorsInvestorsInvestors
IssuersIssuersIssuersIssuers
IntermediariesIntermediariesIntermediariesIntermediaries
Financial Instruments
Research, Data &Opinion Products
Ratings
Financial Instruments
Moody’s Business Model
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Moody’s Higher Education Team
Nine analysts, 600+ site visits over 10 years
279 private colleges and universities
65% of student enrollment
210 public colleges, universities, and systems
90% of student enrollment
98 museums, foundations, & other NFP’s
57 independent schools
888 additional enhanced ratings:
Letter of Credit, Insured-only
Growing trend of these organizations seeking stand-alone ratings
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Moody’s Long-Term Ratings
RATING FINANCIAL SECURITYAaa: ExceptionalAa1,2,3: ExcellentA1,2,3: GoodBaa1,2,3: AdequateBa1,2,3: Moderate B1,2,3: Weak Caa-C: Default
Insurers often make decisions here at A3/Baa1 border
Letters of Credit & Swaps can contain rating triggers here
Speculative Grade
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Rating Distribution Of Moody’s-Rated Private And Public Colleges And Universities
(excludes Insured-only, LOC-backed & Privately rated)
63
109
84
20
56
133
100
0
20
40
60
80
100
120
140
Aaa/ Aa A Baa Below Baa
Private Public
Rating Process And Factors
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Key Rating Factors
Student Demand
Operating
Performance
Legal Structure
Management and
Governance Financial Resources
Capital Needs,
Debt and
Other Liabilities
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Key Credit Factors
Market Position: Education, residential services, research, health care
Operating Performance: Margins and debt service coverage, revenue and expense drivers, budgeting practices
Financial Resources: Amount, level of restriction, investment, fundraising, future growth prospects
Debt and Capital Profile: Capital intensity, sources of funds for capital investment, current and projected debt strategy/leverage, debt structure and legal analysis
Management and Governance: Diversity of expertise and experience, accountability and reporting, renewal of personnel
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Key Credit Ratios
Market Position: FTE enrollment, selectivity & yield, net tuition per student
Operating Performance: Operating margin, cash flow margin, debt service coverage, share of revenue from tuition and auxiliaries
Financial Resources: Total cash and investments, expendable financial resources to debt and to operations, average gift revenue
Debt and Capital Profile: Debt service to operations, debt to revenue, MADS coverage
Management and Governance: Various—operating performance, ability to forecast results, reaction to surprises
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Key Credit Trends Facing Sector
Changing Demographic Environment
Flattening of Federal Research Funding
Increasingly Complex Debt and Investment Management Strategies
Evolving Relationship Between Public Institutions and Sponsoring States
Growing Governmental Scrutiny and Potential for Increased Regulation
Balance of Power Between Faculty, Administration, Board in Increasingly Market Based Industry
Debt Structure
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How Does Moody’s View Variable Rate Debt And Interest Rate Swaps?
Higher Education and NFPs Are Active Variable Rate Debt Users
0%
10%
20%
30%
40%
50%
Aaa Aa A Baa
Median Variable Rate Exposure, Private Colleges
Key Points
There is no “right” allocation to variable rate debt, varies by credit position
Managing variable rate risks:
Calls on liquidity
Interest rate risk
Interest rate swaps are usually less risky than structure of underlying debt and institution’s asset allocations
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How Does Moody’s View Different Security Features?
Key Points
Secured revenue pledges, debt service reserve funds, covenants often are net positives for the credit rating.
Rarely rise to level of importance that will generate different rating outcome in Baa1 and higher ratings
Frequent exception are auxiliary revenue pledges at public universities (i.e. Housing and Dining Bonds; Research Bonds etc.)
Can “go too far” if limitations restrict prudent, strategic decision making
Off Balance Sheet Structures
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Moody’s “Big Picture” Approach
Accounting treatment is less important than
economic motivations
Off-Balance Sheet does NOT equal Off-Credit
Legal requirements are often surpassed by
universities if it’s strategically and financially
important to them
Indirect support of a project more likely than direct
payment of debt service
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Privatized Student Housing: Often ON CREDIT*
Housing is core to operations, market position and
mission of most institutions
Projects usually on university land, often on core
campus; Universities don’t move & treat land as
“endowment-like”
University often has some operational role
(marketing, management, referrals, etc.)
University owns the building after financing
*See Moody’s: “Privatized Student Housing & Debt Capacity”, Oct. 2006
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Privatized Housing: Opportunity Costs
University foregoes a typically high-margin
business of student housing
University foregoes an element of pricing
flexibility and future competitive pricing ability
University foregoes some control of a
component of campus life that provides
competitive differentiation
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Academic Buildings
Measuring Impact On Debt Capacity
$ Cost $ Gain
Core
Non-Core
Student HousingResearch Buildings
Tech Research Parks
Market-Rate Housing
Campus Parking
Debt
Capacity
Impact
Rises
Student Village/Retail
Retirement Community
Sports Facilities
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Key Questions Moody’s Will Ask
Is this a financial transaction or a strategic project?
(short-term vs. long-term)
How “core” is the project to the mission, market
position, and operation of the University?
What benefits does the University gain from the
proposed structure of the financing?
What would the University likely do if the project
were to struggle/fail?
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A Note On Moody’s Existing Ratios
Direct, Indirect and Comprehensive Debt
Indirect Debt includes:
Capitalized Operating Leases
Difference b/t PBO and Fair Value of Defined Benefit
Pension Plans
Debt associated with projects not directly issued by
university (i.e. privatized student housing)
