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Credit Ratings In Higher Education

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Title: Credit Ratings In Higher Education


1
Credit Ratings In Higher Education
Presented by Roger Goodman Vice President and
Team Manager 212-553-3842 Roger.Goodman_at_Moodys.com

2
Agenda
  • 1) Moody's Overview, Portfolio Overview,
    Background on Ratings
  • 2) Rating Process
  • 3) Key Debt Structuring FAQ's
  • 4) Non-Traditional Financing/P3s

3
Moodys Background
4
Moodys Business Model
Issuers
Ratings
Financial Instruments
Intermediaries
Financial Instruments
Research, Data Opinion Products
Investors
5
Moodys 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 NFPs
  • 57 independent schools
  • 888 additional enhanced ratings
  • Letter of Credit, Insured-only
  • Growing trend of these organizations seeking
    stand-alone ratings

6
Moodys Long-Term Ratings
Insurers often make decisions here at A3/Baa1
border
  • RATING FINANCIAL SECURITY
  • Aaa Exceptional
  • Aa1,2,3 Excellent
  • A1,2,3 Good
  • Baa1,2,3 Adequate
  • Ba1,2,3 Moderate
  • B1,2,3 Weak
  • Caa-C Default

Letters of Credit Swaps can contain rating
triggers here
Speculative Grade
7
Rating Distribution Of Moodys-Rated Private And
Public Colleges And Universities(excludes
Insured-only, LOC-backed Privately rated)
8
Rating Process And Factors
9
Key Rating Factors
Student Demand
Capital Needs, Debt and Other Liabilities
Management and Governance
Operating Performance
Financial Resources
Legal Structure
10
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

11
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 Variousoperating
    performance, ability to forecast results,
    reaction to surprises

12
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

13
Debt Structure
14
How Does Moodys View Variable Rate Debt And
Interest Rate Swaps?
  • 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 institutions
    asset allocations

15
How Does Moodys 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

16
Off Balance Sheet Structures
17
Moodys 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 its strategically and
    financially important to them
  • Indirect support of a project more likely than
    direct payment of debt service

18
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 dont move treat land
    as endowment-like
  • University often has some operational role
    (marketing, management, referrals, etc.)
  • University owns the building after financing

See Moodys Privatized Student Housing Debt
Capacity, Oct. 2006
19
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

20
Measuring Impact On Debt Capacity
Core
Gain
Cost
Debt Capacity Impact Rises
Non-Core
21
Key Questions Moodys 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?

22
A Note On Moodys 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)

23
QA
Presented by Roger Goodman Vice President and
Team Manager 212-553-3842 Roger.Goodman_at_Moodys.com
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