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Credit Ratings In Higher Education

Understand credit ratings for higher education institutions, rating process, factors, and trends. Learn about debt structures, management, and off-balance sheet strategies impacting credit ratings.

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Credit Ratings In Higher Education

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

  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 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

  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

  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 Other Liabilities Student Demand 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

  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

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

  21. Key Questions Moody’s Will Ask • Is this a financialtransaction 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 212-553-3842 Roger.Goodman@Moodys.com

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