Transcript Credit Ratings In Higher Education Roger Goodman Vice President and Team Manager

Credit Ratings
In Higher Education
Presented by:
Roger Goodman
Vice President and Team Manager
212-553-3842
[email protected]
Agenda
1) Moody's Overview, Portfolio Overview,
Background on Ratings
2) Rating Process
3) Key Debt Structuring FAQ's
4) Non-Traditional Financing/P3s
2
Moody’s Background
Moody’s Business Model
Issuers
Ratings
Financial
Instruments
Intermediaries
Financial
Instruments
Research, Data &
Opinion Products
Investors
4
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 standalone ratings
5
Moody’s Long-Term Ratings
RATING
Aaa:
Aa1,2,3:
A1,2,3:
Baa1,2,3:
Ba1,2,3:
B1,2,3:
Caa-C:
FINANCIAL SECURITY
Exceptional
Excellent
Good
Adequate
Moderate
Weak
Default
Insurers often make
decisions here at
A3/Baa1 border
Letters of Credit &
Swaps can contain
rating triggers here
Speculative Grade
6
Rating Distribution Of Moody’s-Rated
Private And Public Colleges And Universities
(excludes Insured-only, LOC-backed & Privately rated)
140
133
120
109
100
80
60
84
63
56
40
20
10
0
Aaa/Aa
A
Private
Baa
20
0
Below Baa
Public
7
Rating Process And Factors
Key Rating Factors
Capital Needs,
Student Demand
Debt and
Other Liabilities
Operating
Performance
Management and
Governance
Financial Resources
Legal Structure
9
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
10
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
11
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
12
Debt Structure
How Does Moody’s View Variable Rate Debt
And Interest Rate Swaps?
Key Points
Higher Education and NFPs Are Active
Variable Rate Debt Users

50%
40%

30%
There is no “right”
allocation to variable rate
debt, varies by credit
position
Managing variable rate
risks:
 Calls on liquidity
20%
10%

Interest rate risk
0%
Aaa
Aa
A
Baa
Median Variable Rate Exposure, Private Colleges

Interest rate swaps are
usually less risky than
structure of underlying
debt and institution’s
asset allocations
14
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
15
Off Balance Sheet Structures
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
17
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
18
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
19
Measuring Impact On Debt Capacity
Core
Academic Buildings
Research Buildings
Student Housing
Campus Parking
Sports Facilities
Tech Research Parks
Student Village/Retail
$ Cost
Debt
Capacity
$ Gain
Retirement Community
Impact
Market-Rate Housing
Rises
Non-Core
20
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?
21
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)
22
Q&A
Presented by:
Roger Goodman
Vice President and Team Manager
212-553-3842
[email protected]