credit crisis, recession and higher education
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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 . - PowerPoint PPT PresentationTRANSCRIPT
Credit Crisis, Recession and Higher Education
December 5, 2008Presented by: Roger GoodmanVP & Team LeaderMoody’s Higher Education & NFP [email protected](212) 553-3842
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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
33
Ratings Approach:Six Key Rating Categories
Student Demand
Financial ResourcesOperating
Performance
Management and
Governance
Capital Needs,
Debt and
Other Liabilities
Legal Structure
4
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
5
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
6
Separate the Short & Long-Term Issues
Source: Moody’s.com
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
Long-Term Economic impact on
tuition pricing and affordability
Strategic and Facilities Planning
Investment loss impact on endowment spending
Philanthropy under pressure
7
Capital Markets Frozen but Thawing?
Source: Moody’s.com
Fixed rate debt was unavailable; issuance growing Variable rate market highly volatile
How Tight Will Capital Market Access Be for Colleges?
0
20
40
60
80
100
120
140
160
5-1-
989-
10-9
8
1-21
-99
6-3-
99
10-1
4-99
2-24
-00
7-6-
0011
-16-
00
3-29
-01
8-9-
0112
-20-
01
5-2-
029-
12-0
2
1/23
/200
36/
5/20
03
10/1
6/20
032/
26/2
004
7/8/
2004
11/1
8/20
043/
31/2
005
8/11
/200
512
/22/
2005
5/4/
2006
9/14
/200
6
1/25
/200
76/
7/20
07
10/1
8/20
072/
28/2
008
7/10
/200
8
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
Baa-Aaa Spread 7 Day VMIG Composite
8
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
9
Formerly Hidden Risks of Variable Rate DebtCurrent conditions have brought these to the forefront
Financial Covenants
Renewal/Rollover Risk
Collateral Posting
Rating Triggers
Probability
Mag
nitu
de
10
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?
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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
Percent Change in Household Net Worth
-15%
-10%
-5%
0%
5%
10%
15%
'01 '02 '03 '04 '05 '06 '07 CurrentProjection*
Source: Moody’s Economy.com; Federal Reserve
Will Higher Ed Hit a Tipping Point in Pricing?
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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?
Even Substantial Declines in FY2008 and FY2009 Mostly Match Gains of Recent Years
$152,615$176,670
$195,050$214,634
$251,913$226,722
$158,705
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
2003 2004 2005 2006 2007 FY2008 Projected(Down 10%)
FY2009:Additional 30%
Decline
Med
ian
Cas
h an
d In
vest
men
ts
Source: Moody’s.com
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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 Economy.com and Giving USA
Growth in Giving to Education Flattened in 2001-03; Will Likely Fall in 2009-10
-4%
0%
4%
8%
12%
16%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Actual Estimated
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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 ResultsHas 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?
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What to Do? Don’t Take Liquidity & Market Access for Granted
READ DOCUMENTSWho are your corporate partners?
Are they diversified?What would impact of mergers, bankruptcies, etc. have on the institution?
Build TransparencyDo students and families truly understand financial aid options?
Answer is NOInform investors in your bonds
Higher Ed Accounting is very opaque
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What to Do? Maintain investment diversity and rational liquidity
Not only by asset class, but by managerConsider what is given up in alternative investments
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What to Do? Don’t Panic (ie. Why aren’t we downgrading everybody?)
Great Business ModelHow Paid, Subsidies, Capital Needs, etc.
Underlying Demand is Strong and Resilient, if not Counter-cyclicalStrengthened tremendously in last decade; room to weakenAbility to slow capital investmentMost cases, room to reduce expenses
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Questions and Answers
Contact:Roger GoodmanVP & Team LeaderMoody’s Higher Education & NFP [email protected](212) 553-3842