RATING AGENCIES APPROACH TO UNIVERSITIES Paul Calder, Director Canadian Public Finance & Infrastructure Group Canadian Association of University Business Officers’ Conference: June 15, 2004

S&P provides an independent view of the credit quality of a given borrower/issuer? Ratings are a composite measure of the probability of issuer default. Ratings assess the ability and willingness of a borrower to meet its debt obligations according to contractual terms. S&P ratings are linked to timely payment and not the prospect of principal recovery given a payment default. Ratings benefit issuers by increasing the universe of potential investors: can have a positive pricing impact by increasing investor demand. What is a Rating and Why is it Important to a University Issuer?

3June 2004 S&P Credit Rating Categories AAA AA (+/-) A (+/-) BBB (+/-) S&P long-term rating categories: >> investment grade >>non-investment grade BB (+/-) B (+/-) CCC, CC and C (+/-) D (default)

Higher Education: relatively new rating category in Canada. New investment asset class as well. Standard & Poor’s has 7 public ratings on Canadian Universities? A few more ratings are expected but sector seems to be maturing? Standard & Poor’s Ratings

5June 2004 Standard & Poor’s Ratings Issuer Queen’s University University of Toronto McMaster University McGill University University of British Columbia University of Guelph York University Rating AA+/Stable AA/Stable AA-/Stable AA-/Positive AA-/Stable AA-/Negative

University of Toronto$360 McGill University$150 University of British Columbia$125 Queen’s University$ 90 McMaster University$150 University of Guelph$100 York University$300 University of Ottawa$150 Concordia University$200 Simon Fraser University$150 Université de Québec a Montréal$150 Capital Market Debt Outstanding (C$, millions)

Senior unsecured debt offerings. Few restrictive covenants (i.e. no additional issuance or DSCR tests, no DSRF). Long-term (30-50 year maturities) with bullet principal payment profile. Discretionary sinking fund provisions. Generally tight pricing off provincial bond benchmarks (25-40 basis points). Strong institutional investor demand. Fewer ratings in Canada relative to other countries (less mature capital market and established banking relationships). Characteristics of Canadian University Capital Market Financing to date

Rising cost environment (staff, energy, insurance, pension contributions, post- retirement benefits) Deferred capital expenditures / maintenance Significant provincial fiscal pressures - impact on tuition policy and grant funding support? Fundraising (increasing participation rates and growing donor fatigue) Potential asset weakness -Pension -Endowment Regulated fee setting -Revenue-expenditure mismatch? Rating Challenges

Rating agencies (S&P) Debt issuer (University of Saskatchewan) Investment banker / underwriter (TD Securities) Commercial banks (RBC) Consultants / advisors (Deloitte & Touche) Investors (Greystone Capital) Legal counsel (Cassels Brock) Participants in a Hypothetical Bond Financing (examples in parentheses)

Demand Finances Capital plan and debt burden Management and governance Endowment and development Balance sheet / liquidity analysis Covenant / legal package Key Rating Factors

Acceptance, matriculation rates Registrations to applications Geographic draw, student quality and attrition measures Various debt ratios Cash flow and liquidity measures Unrestricted financial assets Operating margin Revenue diversity / expenditure flexibility Unfunded pensions and post-retirement benefits Key Ratios & Measures

Important reference point for a university rating due to financial support and policy framework. Hard to analytically de-couple a university’s rating from the underlying provincial obligor. Ratings above the provincial general obligation rating are the exception, not the norm. Ability to service debt obligations independent of provincial support? Rating selection is bias to date. Provincial Rating Linkage to Public Institutions

13June 2004 System Differences (to the U.S.) Contributing to Strong Canadian University Ratings No private or for-profit institutions (less competition, stronger aggregate system demand profile). No history of defaults or financial re-structurings leading to lender loss. Positive and durable demographic student demand trend in most provincial jurisdictions, but variations exist. Off-set partly by variability in government policy and funding frameworks in many provincial jurisdictions.

14June 2004 Rating Distribution in Canada Public Universities - April 2004 (7 S&P ratings) AA+ 1 AA 2 AA-4 A0 BBB0 ‘AA’ range ratings in aggregate attest to selection bias among higher educ. universe.

15June 2004 Rating Distribution in the U.S. Public Universities - April 2004 (400+ S&P ratings) AAA2% AA33% A53% BBB12% Ratings penetration in U.S. about 40% for public institutions– much smaller in Canada (market maturity issue).