Credit Ratings In Higher Education

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

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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

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Moodys Background
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Moodys Business Model
Issuers
Ratings
Financial Instruments
Intermediaries
Financial Instruments
Research, Data Opinion Products
Investors
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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

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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
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Rating Distribution Of Moodys-Rated Private And
Public Colleges And Universities(excludes
Insured-only, LOC-backed Privately rated)
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Rating Process And Factors
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Key Rating Factors
Student Demand
Capital Needs, Debt and Other Liabilities
Management and Governance
Operating Performance
Financial Resources
Legal Structure
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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 Variousoperating
  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

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Debt Structure
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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

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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

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Off Balance Sheet Structures
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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

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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 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
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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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Measuring Impact On Debt Capacity
Core
Gain
Cost
Debt Capacity Impact Rises
Non-Core
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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?

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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)

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