Credit Crisis, Recession and Higher Education

1
Credit Crisis, Recession and Higher Education
Presented by Roger Goodman VP Team
Leader Moodys Higher Education NFP
Team roger.goodman_at_moodys.com [phone]
December 5, 2008
2
Overview of Moodys U.S. Higher Ed
PortfolioMore 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

3
Ratings ApproachSix Key Rating Categories
Capital Needs, Debt and Other Liabilities
Student Demand
Management and Governance
Financial Resources
Operating Performance
Legal Structure
3
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

5
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

6
Separate the Short Long-Term Issues

• 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

Source Moodys.com
7
Capital Markets Frozen but Thawing?

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

Source Moodys.com
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 Debt
Current conditions have brought these to the
forefront
Renewal/Rollover Risk
Rating Triggers
Financial Covenants
Collateral Posting
10
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?

11

Will Higher Ed Hit a Tipping Point in Pricing?

• 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

Source Moodys Economy.com Federal Reserve
12
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?

Source Moodys.com
13
Philanthropy Expected to Feel Some Pressure

• Finance industry hit particularly hard in this
  cycle compared to prior downturns drop in
  fundraising may result

Source Moodys Economy.com and Giving USA
14
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 Results
• Has 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?

15
What to Do?

• Dont Take Liquidity Market Access for Granted
• READ DOCUMENTS
• Who are your corporate partners?
• Are they diversified?
• What would impact of mergers, bankruptcies, etc.
  have on the institution?
• Build Transparency
• Do students and families truly understand
  financial aid options?
• Answer is NO
• Inform investors in your bonds
• Higher Ed Accounting is very opaque

16
What to Do?

• Maintain investment diversity and rational
  liquidity
• Not only by asset class, but by manager
• Consider what is given up in alternative
  investments

17
What to Do?

• Dont Panic (ie. Why arent we downgrading
  everybody?)
• Great Business Model
• How Paid, Subsidies, Capital Needs, etc.
• Underlying Demand is Strong and Resilient, if not
  Counter-cyclical
• Strengthened tremendously in last decade room to
  weaken
• Ability to slow capital investment
• Most cases, room to reduce expenses

18
Questions and Answers

• Contact
• Roger Goodman
• VP Team Leader
• Moodys Higher Education NFP Team
• roger.goodman_at_moodys.com
• [phone]