Title: Credit Ratings In Higher Education
1Credit Ratings In Higher Education
Presented by Roger Goodman Vice President and
Team Manager 212-553-3842 Roger.Goodman_at_Moodys.com
2Agenda
- 1) Moody's Overview, Portfolio Overview,
Background on Ratings - 2) Rating Process
- 3) Key Debt Structuring FAQ's
- 4) Non-Traditional Financing/P3s
3Moodys Background
4Moodys Business Model
Issuers
Ratings
Financial Instruments
Intermediaries
Financial Instruments
Research, Data Opinion Products
Investors
5Moodys 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
6Moodys 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
7Rating Distribution Of Moodys-Rated Private And
Public Colleges And Universities(excludes
Insured-only, LOC-backed Privately rated)
8Rating Process And Factors
9Key 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
12Key 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
13Debt Structure
14How 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
15How 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
16Off Balance Sheet Structures
17Moodys 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
18Privatized 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
19Privatized 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
20Measuring Impact On Debt Capacity
Core
Gain
Cost
Debt Capacity Impact Rises
Non-Core
21Key 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?
22A 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)
23QA
Presented by Roger Goodman Vice President and
Team Manager 212-553-3842 Roger.Goodman_at_Moodys.com