credit ratings in higher education presented by: laura sander vice president and senior analyst...
TRANSCRIPT
Credit Ratings In Higher Education
Presented by:
Laura Sander
Vice President and Senior Analyst
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Agenda
1) Moody's Overview, Portfolio Overview, Background on Ratings
2) Rating Process and Factors
3) Dislocation in the Auction and VRDO Markets
4) Non-Traditional Financing/P3s
Moody’s Background
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InvestorsInvestorsInvestorsInvestors
IssuersIssuersIssuersIssuers
IntermediariesIntermediariesIntermediariesIntermediaries
Financial Instruments
Research, Data &Opinion Products
Ratings
Financial Instruments
Moody’s Business Model
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Moody’s Higher Education Team
Nine analysts, 650+ site visits over 10 years
273 private colleges and universities
65% of student enrollment
205 public colleges, universities, and systems
90% of student enrollment
100 museums, foundations, & other NFPs
56 independent schools
Approximately 200 institutions rated based solely on some form of credit enhancement
Letter of Credit, Insured-Only
Growing trend of these organizations seeking stand-alone ratings
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Moody’s Long-Term Ratings
RATING FINANCIAL SECURITYAaa: ExceptionalAa1,2,3: ExcellentA1,2,3: GoodBaa1,2,3: AdequateBa1,2,3: Moderate B1,2,3: Weak Caa-C: Default
Insurers often make decisions here at A3/Baa1 border
Letters of Credit & Swaps can contain rating triggers here
Speculative Grade
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Rating Distribution Of Moody’s-Rated Private And Public Colleges And Universities
(excludes Insured-only, LOC-backed & Privately rated)
65
115
74
19
59
135
101
0
20
40
60
80
100
120
140
160
Aaa/ Aa A Baa Below Baa
Private Public
Rating Process And Factors
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Key Rating Factors
Student Demand
Operating
Performance
Legal Structure
Management and
Governance Financial Resources
Capital Needs,
Debt and
Other Liabilities
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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
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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
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Key Credit Trends Facing Sector
Dramatic Changes in the Population of Prospective Students
New Public Policy Proposals and Political Oversight
Weaker Economic Outlook and Housing Pressures
Operational Efficiency and Effectiveness Will Grow Increasingly Important
Balance Sheet Management Improving, But Becoming More Complex
Dislocation in the Auction and VRDO Markets
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Dislocation in Auction Rate Market
Rising interest rates
– Average Rates on 7 Day Auctions
--January 2008 3.890%
--February 27th 6.590%
Dealers unwilling or unable to make a market
Failed auctions
– Failures extended beyond the troubled guarantors and even beyond
insured debt
– Future of auction rate product in doubt
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Auction Rate Market -Impact on Municipal Issuers
Higher debt service costs as interest rates rise either to
clear market or as a result of failed auctions
Liquidity issue for issuers with narrow coverage or
significant amounts of variable rate debt
Swaps no longer provide effective hedge
-Basis risk can create liquidity problems because auction
rates rise while swaps are paying based on LIBOR which
remains low
Liquidity issues can become credit issues
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Dislocation in Variable Rate Demand Obligation Market
Widespread ‘put’ of insured floating rate obligations
- Liquidity linked to insurer
Failed remarketings
–Inability to place VRDOs that have insurance from certain FGs
Dealers increasingly choosing not to hold VRDOs in inventory
–Smaller remarketing agents first, then widespread
–Decisions to hold made on a case-by-case basis
Banks holding “bank bonds”
–Taxable rates
–Ability to terminate facility and accelerate repayment with notice
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VRDO Market -Impact on Municipal Issuers
Higher debt service costs as interest rates rise either to clear market or as a result of bank bonds
Liquidity issue for issuers with narrow coverage or significant amounts of variable rate debt
Swaps no longer effective hedges
Banks may send termination notices resulting in accelerated debt repayment putting added liquidity strain on issuers
Liquidity issues can become credit issues
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Issuers Working Quickly to Address Risks Posed by Troubled ARS and VRDOs
Long-Term Solutions
–Converting or refunding to:
• Fixed rate mode
– May be complicated by presence of swap
• Variable rate demand bonds with self-liquidity, uninsured VRDOs, insured VRDO (adding liquidity facility) or LOCs
• Long put mode
• Most bond documents are multi-modal
–Restructuring insured bonds with a letter of credit
• Obtain LOC that pays principal, interest and purchase price
• First source of payment becomes the letter of credit
• Moody’s can re-rate the bonds based upon the highest of (1) the LOC provider’s rating; (2) the underlying rating of the obligor and (3) the insurer’s rating
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Issuers Working Quickly to Address Risks Posed by Troubled ARS and VRDOs – Long-Term Solutions continued
–Amend existing standby bond purchase agreement
– Short-term ratings of insured floaters are based on the short-term credit quality of the bank and the likelihood of termination of the liquidity facility
• Can eliminate automatic termination events-only notice events
– Short-term rating reflects short-term rating of bank only
• Can make automatic termination events linked only to issuer’s rating
– Short-term rating reflects short-term rating of the bank and long-term rating of the issuer
• Can amend to have automatic termination events linked to both the issuer’s and the financial guarantor’s ratings
– Short-term rating reflects short-term rating of the bank as well as both the issuer’s rating and the financial guarantor’s rating
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Issuers Working Quickly to Address Risks Posed by Troubled ARS and VRDOs – Long-Term Solutions continued
–Deposit auction rate bonds into custodial agreement
• Enhance custodial receipts with a letter of credit
• Establish interest calculation and payments (either fixed or variable) of custody receipts
• Issuer still has obligation to pay deposited bonds, however custodian will “hold’ auction rate bonds, therefore fixing the rate the issuer pays
• Custody receipts rated based on rating of letter of credit provider
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Issuers Working Quickly to Address Risks Posed by Troubled ARS and VRDOs - continued
Short-term solutions
–Bank financing
–CP mode
–Related government entity purchasing ARS
–Adding optional tenders to auction rate bonds
–Temporary amendments to SBPAs
Obtaining new underlying rating or requesting publishing of previously indicative ratings
Some waiting to see what happens
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Market Developments: SEC
Auction Rate Securities
–SEC issued ‘no action letter’ on March 14
–Issuers, conduit issuers or broker dealers can participate in bidding process for
auction rate securities provided that this activity is adequately disclosed
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Market Developments: Liquidity Banks
Banks are getting inundated with requests for LOCs & SBPAs
–Slowing issuers’ ability to “fix” their deals
–Other players backlogged as well
Some willing to amend SBPA documents and some are not
Banks have limited capacity
–Limiting how many new deals they will do and with which issuers
–Banks willingness to hold bank bonds uncertain and depends on underlying credit
Some banks are getting out of the business of providing liquidity for municipal securities
Off Balance Sheet Structures
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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
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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
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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
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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/Retail
Retirement Community
Sports Facilities
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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?
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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)
