1. 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

3. Moody’s Background

4. 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

5. 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:

6. 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.

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

8. Rating Process And Factors

9. Key Rating Factors Capital Needs, Debt and Student Demand
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
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?

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: 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?

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

13. Debt Structure

14. 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

15. 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

16. Off Balance Sheet Structures

17. 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

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 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

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. 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

21. 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?

22. 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)

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