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

Credit Ratings In Higher Education

Presented by:

Roger Goodman

Vice President and Team Manager

212-553-3842Roger.Goodman@Moodys.com

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Agenda

1) Moody's Overview, Portfolio Overview, Background on Ratings

2) Rating Process

3) Key Debt Structuring FAQ's

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, 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

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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)

63

109

84

20

56

133

100

0

20

40

60

80

100

120

140

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

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

Debt Structure

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How Does Moody’s View Variable Rate Debt And Interest Rate Swaps?

Higher Education and NFPs Are Active Variable Rate Debt Users

0%

10%

20%

30%

40%

50%

Aaa Aa A Baa

Median Variable Rate Exposure, Private Colleges

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

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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

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)

Q&A

Presented by:

Roger Goodman

Vice President and Team Manager

212-553-3842

Roger.Goodman@Moodys.com