Credit Ratings In Higher Education

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Presentation transcript:

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

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

Moody’s Business Model Issuers Ratings Financial Instruments Intermediaries This is a graphic representation of Moody’s business model. About 90% of our revenues come from ratings and about 10% from research and opinion products. While issuers are very important to Moody’s business model, we do provide extensive services to investors. Moody’s provides investors with one-on-one access to analysts and distributes its opinions through teleconferences, seminars and attendance at industry conferences. This provides investors with a direct communication channel to the rating agency and creates a market expectation for issuers to seek a rating before issuing fixed income securities. Financial Instruments Research, Data & Opinion Products Investors

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 To give a sense of where our expertise comes from and our daily lives:

Moody’s 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 For reference, our long-term rating scale. Also have other, short-term ratings geared towards debt that can be resold as often as daily. Aaa: Harvard, Yale, Johnson and Johnson Delta—senior unsecured rating of C; General Motors: B2 on review for possible downgrade Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

Rating Distribution Of Moody’s-Rated Private And Public Colleges And Universities (excludes Insured-only, LOC-backed & Privately rated)

Rating Process And Factors

Key Rating Factors Capital Needs, Debt and Student Demand Other Liabilities Management and Governance Operating Performance Financial Resources Legal Structure

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 Does the institution have a well-defined market niche, differentiated from its competitors? Does the niche evolve over time in response to market forces? Does management have a good understanding of market dynamics: geographic, demographic, willingness to pay? Is enrollment stable to growing? Is net tuition per student growing steadily?

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 Does the institution have a well-defined market niche, differentiated from its competitors? Does the niche evolve over time in response to market forces? Does management have a good understanding of market dynamics: geographic, demographic, willingness to pay? Is enrollment stable to growing? Is net tuition per student growing steadily?

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

How Does Moody’s 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 institution’s asset allocations

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

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

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

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

Measuring Impact On Debt Capacity Core Academic Buildings Research Buildings Student Housing Sports Facilities Campus Parking Tech Research Parks Student Village/Retail $ Cost $ Gain Debt Capacity Impact Rises Retirement Community Market-Rate Housing Non-Core

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?

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)

Q&A Presented by: Roger Goodman Vice President and Team Manager 212-553-3842 Roger.Goodman@Moodys.com