Credit Ratings In Higher Education Presented by: Roger Goodman Vice President and Team Manager

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

Moodys Background

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

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 RATING FINANCIAL SECURITY u Aaa: Exceptional u Aa1,2,3: Excellent u A1,2,3: Good u Baa1,2,3: Adequate u Ba1,2,3: Moderate u B1,2,3: Weak u Caa-C: Default Insurers often make decisions here at A3/Baa1 border 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)

Rating Process And Factors

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

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

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

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 Academic Buildings Measuring Impact On Debt Capacity $ Cost $ Gain Core Non-Core Student HousingResearch Buildings Tech Research Parks Market-Rate Housing Campus Parking Debt Capacity Impact Rises Student Village/RetailRetirement CommunitySports Facilities

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)

Q&A Presented by: Roger Goodman Vice President and Team Manager