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Credit Crisis, Recession and Higher Education. Presented by: Roger Goodman VP & Team Leader Moody’s Higher Education & NFP Team [email protected] (212) 553-3842. December 5, 2008. Overview of Moody’s U.S. Higher Ed Portfolio: More than 550 Ratings; $125 Billion Rated Debt .

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credit crisis recession and higher education

Credit Crisis, Recession and Higher Education

Presented by:

Roger Goodman

VP & Team Leader

Moody’s Higher Education & NFP Team

[email protected]

(212) 553-3842

December 5, 2008

overview of moody s u s higher ed portfolio more than 550 ratings 125 billion rated debt
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
ratings approach six key rating categories
Ratings Approach:Six Key Rating Categories

Capital Needs,

Debt and

Other Liabilities

Student Demand

Management and


Financial Resources



Legal Structure


so much has happened
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
what issues relate to higher ed
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
separate the short long term issues
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’

capital markets frozen but thawing
Capital Markets Frozen but Thawing?
  • Fixed rate debt was unavailable; issuance growing
  • Variable rate market highly volatile

Source: Moody’

changes in capital markets and debt structures
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
formerly hidden risks of variable rate debt
Formerly Hidden Risks of Variable Rate Debt

Current conditions have brought these to the forefront

Renewal/Rollover Risk

Rating Triggers

Financial Covenants

Collateral Posting

growing concerns about liquidity
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?

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; Federal Reserve

investment losses are large but lt impact more muted
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’

philanthropy expected to feel some pressure
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 and Giving USA

what to do
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?
what to do1
What to Do?
  • Don’t Take Liquidity & Market Access for Granted
    • 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
what to do2
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
what to do3
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

Questions and Answers


Roger Goodman

VP & Team Leader

Moody’s Higher Education & NFP Team

[email protected]

(212) 553-3842