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Credit Crisis, Recession and Higher Education. Presented by: Roger Goodman VP & Team Leader Moody’s Higher Education & NFP Team (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

(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?

Credit crisis recession and higher education

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

Credit crisis recession and higher education

Questions and Answers


Roger Goodman

VP & Team Leader

Moody’s Higher Education & NFP Team

(212) 553-3842