Credit Crisis, Recession and Higher Education

1. Credit Crisis, Recession and Higher Education Presented by: Roger Goodman VP & Team Leader Moody’s Higher Education & NFP Team roger.goodman@moodys.com (212) 553-3842 December 5, 2008

2. Overview of Moody’s U.S. Higher Ed Portfolio:More than 550 Ratings; $125 Billion Rated Debt • Private N.F.P. Higher Education: 300 issuers & $50 bill. debt • Median rating of A3 • Ratings cover 70% of enrollment • Ratings cover 20% of institutions • Many additional credit-enhanced LOC ratings • Public Higher Education: 200 issuers & $75 bill. Debt • Median rating of A1 • Ratings cover 95% of enrollment • Ratings cover 90% of 4-year colleges, universities & systems • Community Colleges: 60 issuers & $1 bill. Debt • Many issuers finance with tax-backed debt rated by LG teams • Joint analysis with local government analysts

3. Ratings Approach:Six Key Rating Categories Capital Needs, Debt and Other Liabilities Student Demand Management and Governance Financial Resources Operating Performance Legal Structure 3

4. So Much Has Happened… • Lehman Bankruptcy • Bond Insurer downgrades • Bear Stearns rescue • Merrill Lynch merger/rescue • Citigroup bailout • AIG bailout • Unemployment spiking • $700 B rescue plan • Election • Washington Mutual rescue • Foreclosures spiking • Home values declining

5. What issues relate to Higher Ed… • Changing Demographic Environment • Flat Federal Research Funding • Increasingly Complex Debt & Investment Strategies • Have hedge funds lived up to expectations • Are liquid funds really liquid? • What are risks of debt portfolio, esp. variable rate structures • Growing Governmental Scrutiny & Risk of Increased Regulation • Wealth Concentration Continues, Driven by Superior Fundraising and Investment Returns • Credit Markets Tighten for Higher Ed Borrowers, lack of enhancement providers • Student Loan availability stressed • Family wealth and ability/willingness to pay newly strained by loss of home equity in addition to stock market losses

6. Separate the Short & Long-Term Issues • Long-Term • Economic impact on tuition pricing and affordability • Strategic and Facilities Planning • Investment loss impact on endowment spending • Philanthropy under pressure • Short-Term • Capital Market Freeze • Variable rate market disruptions • Lack of market access to issue new debt • Liquidity impacts • Commonfund freeze • Potential for Problems with Hedge Funds Source: Moody’s.com

7. Capital Markets Frozen but Thawing? • Fixed rate debt was unavailable; issuance growing • Variable rate market highly volatile Source: Moody’s.com

8. Changes in Capital Markets and Debt Structures? • Greater differentiation of credit quality • Increased demand for security features by investors • Rapid increase in use of letters-of-credit and short-term debt; new issue (rather than restructurings) likely to be fixed • Periodic shutdown of fixed rate markets • Slow-down in capital spending plans

9. Formerly Hidden Risks of Variable Rate Debt Current conditions have brought these to the forefront Renewal/Rollover Risk Rating Triggers Financial Covenants Collateral Posting

10. Growing Concerns About Liquidity • Commonfund Short Term Fund • Money market funds “breaking the buck”, halting redemptions • Increased pace of capital calls coupled with slowed distributions from private investments • Reduced cash balances and decisions to invest working capital “alongside endowment” • Reduced access to bank/external liquidity? • Cash flow problem from student loan disruption?

11. Will Higher Ed Hit a Tipping Point in Pricing? Remained Strong in Prior Recessions; Is This Cycle Different? • Net worth losses already larger than 2000-2002 • Liquid wealth decline at same time as home equity loss • Borrowing capacity reduced • Student Lenders & Home Equity • Political constraints tighter than economic constraints Source: Moody’s Economy.com; Federal Reserve

12. Investment Losses are Large, but LT Impact More Muted Will Hedge Funds & Mgmt Live Up to Expectations? • First major test since wave of higher ed investment • Much greater volatility than typical • Forced de-leveraging in some cases at wrong time • Will liquidity of investments meet expectations • Will cuts be made to meet spending policies? Or did management control growth in up years? Source: Moody’s.com

13. Philanthropy Expected to Feel Some Pressure • Finance industry hit particularly hard in this cycle compared to prior downturns; drop in fundraising may result Source: Moody’s Economy.com and Giving USA

14. What to Do? • Revisit Risk Management Approach • Does Board understand debt structure? • Who are your corporate partners? • Are they diversified? • What would impact of mergers, bankruptcies, etc. have on the institution? • Plan conservatively and Measure Results • Has management planned conservatively for enrollment, tuition and financial aid? • Do you know how many requests for additional aid your financial aid office has received? • Have you identified areas of potential cutback if necessary?

15. What to Do? • Don’t Take Liquidity & Market Access for Granted • READ DOCUMENTS • Who are your corporate partners? • Are they diversified? • What would impact of mergers, bankruptcies, etc. have on the institution? • Build Transparency • Do students and families truly understand financial aid options? • Answer is NO • Inform investors in your bonds • Higher Ed Accounting is very opaque

16. What to Do? • Maintain investment diversity and rational liquidity • Not only by asset class, but by manager • Consider what is given up in alternative investments

17. What to Do? • Don’t Panic (ie. Why aren’t we downgrading everybody?) • Great Business Model • How Paid, Subsidies, Capital Needs, etc. • Underlying Demand is Strong and Resilient, if not Counter-cyclical • Strengthened tremendously in last decade; room to weaken • Ability to slow capital investment • Most cases, room to reduce expenses

18. Questions and Answers Contact: Roger Goodman VP & Team Leader Moody’s Higher Education & NFP Team roger.goodman@moodys.com (212) 553-3842