welcome to today’s nacubo webcast...ted spread 11.1% commerical paper/t-bill spread 11.1%...
TRANSCRIPT
Welcome to Today’s NACUBO Webcast
Our program will begin shortly with a brief introduction on how to
use the desktop interface.
Understanding the Institutional Impact of the Current Economic Climate
December 2, 2008
Moderator and Panelists
• J. Michael Gower, Vice President and CFO, Yeshiva University
• Stephen T. Golding, Executive Vice President, Cornell University
• Michael Strauss, Chief Economist and Chief Operating Officer, Commonfund
• Linda Fan, Managing Director, Prager, Sealy & Co., Inc.
• John Nelson, Managing Director, Moody's
No part of the balance sheet is immune Institutional liquidity is strainedEndowments face unprecedented
declineCredit market contractions compromise
debt strategies
We are faced with the Perfect Financial Storm:
States are reducing in-year and multi-year budgetsFundraising support is in precipitous
declineEndowments see an unprecedented dropThere is a real decline in research
funding
We are faced with the Perfect Financial Storm:
Endowment spending policy Debt portfolio construction Credit markets Liquidity Access to capital
Historical operating assumptions have undergone significant dislocation
Teaching and service Technology development Community-based economic
engine Promoting accessibility
Political pressure to stay mission-centric is not receding:
Strains on financial aid Tuition increases are
scrutinizedDemands for transparency on
spending
Political pressure to manage costs while remaining accessible is increasing:
testing the boundaries between governance and management:
The role of trustee leadership The role of trustee committees Trustees and management working together Financial reporting and disclosure Transparency
The current financial crisis is …
To help you come out of the current financial predicament
strongerthan you were going into it.
Goal of this session:
• To help you think about how to meet the challenges• To make sure we are collectively asking the tough
questions • To recognize that we must find institution-specific
solutions• To share different approaches• To identify external sources to help you think through
the issues
How??
Polling Question #1
• What is your role/perspective on campus:
• a) CFO/Business Office Staff• b) Chief Investment Officer• c) Board Member/Trustee• d) Other
Consensus World GDP Forecasts2.
0%
2.1%
3.0%
2.6%
5.4%
8.1%
9.3%
11.9
%
9.8%
2.6%
8.0%
1.6%
0.7% 1.0% 1.
3%
5.2%
7.0%
7.9%
9.7%
8.5%
1.5%
6.9%
0.0% 0.
5%
-0.1
%
0.2%
3.5%
5.5%
6.9%
9.3%
8.0%
0.5%
6.1%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
U.S. Japan UK Euro area Brazil Russia India China BRICs Developedmarkets
Emergingmarkets
200720082009
Source: IMF, ISI – October 2008
2008 1.0% 0.5% 0.5% 5.0% 9.0% 8.0% 1.0% 6.2%
2009 -0.5% -0.2% -1.2% 3.5% 7.5% 6.0% -0.5% 4.5%
Commonfund Estimates where significant different from IMF
U.S. Real GDP
Source: BEA
-2%
0%
2%
4%
6%
8%
10%
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Per
cent
Cha
nge
From
Qua
rter O
ne Y
ear
Ago
-2%
0%
2%
4%
6%
8%
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
Qua
rter
ly G
DP
(%)
Employment: January 1986 – October 2008
Source: BLS
Black MondayOctober 19, 1987
S&L Crisis1990
Mexican Debt Crisis | 1995
Russia/ LTCM1998
NASDAQ Collapse | 2000
0%
2%
4%
6%
8%
10%
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Civi
lian
Unem
ploy
men
t Rat
e
-2%
-1%
0%
1%
2%
3%
4%
Nonf
arm
Pay
roll
Em
ploy
men
t
Civilian Unemployment Rate (left axis)Nonfarm Payroll Employment (right axis)
Credit Crisis | 2007 – 2008
6.8% Price Decline
from October 1989 to April 1991
Housing Price Appreciation …. Depreciation
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Year
Ove
r Yea
r Cha
nge
0
50
100
150
200
250
Inde
x Va
lue
Year over Year Change
Composite-10S&P/Case-Shiller Home Price Index (Composite of 10)
Source: Standard & Poors, January 1987 – July 2008
22.0% Price Decline
from June 2006 to August 2008
Inflation | Has Peaked January 2003 – September 2008
Source: BLS
8.7%
4.0%
4.9%
2.5%
-4%
-2%
0%
2%
4%
6%
8%
10%
Jan
2003
May
200
3
Sep
2003
Jan
2004
May
200
4
Sep
2004
Jan
2005
May
200
5
Sep
2005
Jan
2006
May
200
6
Sep
2006
Jan
2007
May
200
7
Sep
2007
Jan
2008
May
200
8
Sep
2008
Perc
ent (
%)
PPI (YoY)
PPI ex Food & Energy (YoY)
CPI (YoY)
CPI ex Food & Energy (YoY)
Non-Farm Unit Labor Costs Help to Keep PCE Costs Modest Year-to-Year Changes 3/31/1960 - 9/30/2008
Source: Ned Davis Research
Quarterly Data 3/31/1960 - 9/30/2008
(E708A)
Core Personal Consumption Expenditures Price Index
9/30/2008 = 2.5%
Nonfarm Labor Costs (Smoothed)
9/30/2008 = 1.0%
Correlation Coefficient = 0.88-1.2-0.8-0.40.00.40.81.21.62.02.42.83.23.64.04.44.85.25.66.06.46.87.27.68.08.48.89.29.6
10.010.410.811.211.6
-1.2-0.8-0.40.00.40.81.21.62.02.42.83.23.64.04.44.85.25.66.06.46.87.27.68.08.48.89.29.6
10.010.410.811.211.6
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Core PCE vs Nonfarm Unit Labor Costs
(Year-to-Year Changes)
World Population
0
1,000
2,000
3,000
4,000
5,000
6,000
1750 1800 1850 1900 1950 2000 2050 2150
(Mill
ions
)
AfricaAsiaEuropeLatin America and the CaribbeanNorthern America
Source: U.S. Census Bureau
Africa
Asia
18
Global GDP by Region | 1995 vs. 2007 numbers in percent | totals = 100%
24
26
8
96
Germany4 5
United Kingdom
5United States France
4
44
Italy
14
13
Other DevelopedJapan
1995
2007
Developed
Developing Economies
Source: ISI
22
34
Developing Economies
11/14/2008 (6.71)
11/10/2008 (6.29)
10/24/2008 (7.99)
9/23/2008 (5.07)
10/8/1998 (2.65)
12/25/2000 (2.43)
10/9/2002 (2.00)
10/20/2008 (8.25)
10/10/2008 (10.02)
(11.0)
(10.0)
(9.0)
(8.0)
(7.0)
(6.0)
(5.0)
(4.0)
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
Jan-92 Sep-93 May-95 Jan-97 Sep-98 May-00 Jan-02 Sep-03 May-05 Jan-07 Sep-08
Stan
dard
Dev
iatio
n
Russian Financial Crisis Dot Bomb
2002 Credit Crunch
Credit Crisis
Financial Conditions Index January 1992 – November 2008
Source: The Bloomberg Financial Conditions Index. The index combines yield spreads and indices from the money markets, equity markets, and bond markets into a normalized index. The values of this index are z-scores, which represent the # of standard deviations that current financial conditions lie above/below the average from 1992 – Nov 14, 2008.
Money Market Index WeightTed Spread 11.1%Commerical Paper/T-Bill Spread 11.1%Libor-OIS Spread 11.1%
33.3%
Bond Market
Investment-Grade Corporate/Treasury Spread 6.7%
Muni/Treasury Spread 6.7%
Swaps/Treasury Spread 6.7%
High Yield/Treasury Spread 6.7%
Agency/Treasury Spread 6.7%
33.3%
Equity Market S&P 500 Share Prices 16.7%
VIX Index 16.7%
33.3%
Total 100%
Bloomberg’s U.S. Financial Conditions Index Components and Weights
T-Bills, Fed Funds, & Eurodollar 1/03/1989 - 11/14/2008
Source: Ned Davis Research
(B0122)
3-Month T-Bill Yield11/14/2008 = 0.14%
( )
Fed Funds Target Rate11/14/2008 = 1.00%
( )
3-Month Eurodollar11/14/2008 = 3.00%
( )123456789
10
123456789
10
Eurodollar minus Fed Funds Target Rate 11/14/2008 = 200
Mean = 200
60120180240300360420
060
120180240300360420
Eurodollar minus T-Bill Yield
11/14/2008 = 286Mean = 530
100200300400500
0100200300400500
1989M J S D
1990M J S D
1991M J S D
1992M J S D
1993M J S D
1994M J S D
1995M J S D
1996M J S D
1997M J S D
1998M J S D
1999M J S D
2000M J S D
2001M J S D
2002M J S D
2003M J S D
2004M J S D
2005M J S D
2006M J S D
2007M J S D
2008M J S
S&P 500 | Historical Downturns
Source: Bloomberg
Years to Recovery 5.8 0.4 1.7 0.3 4.7 ?
?
-46.2%
-23.8%
-30.2%
-15.8%
-46.3%-41.96%
32.0%
51.8%
18.8%
29.1%
22.2%
-60%
-40%
-20%
0%
20%
40%
60%
1972-1975(33 months)
1980-1983(32 months)
1987-1988(15 months)
1990-1991(17 months)
2000-2003(37 months)
2007-10/10/2008(11 months)
Peak to trough "drawdown"
Percent change in 12 months following trough
?
Polling Question #2
• What area is of greatest concern to your institution at this time?
a) Liquidityb) Enrollmentc) Fundraisingd) Debt service costse) Cuts in state fundingf) Endowment decline
• Prior to 9/10-9/17:• Treasury conservatorship of Fannie Mae and Freddie Mac announced• Merrill and Bank of America merger announced• Lehman files for Chapter 11 and Barclay’s buys Lehman’s investment banking assets• Shares of Reserve Primary fund falls below $1 due to Lehman exposure
3.45%
5.74%
7.96%
1.63% 1.82%As of 11/19
1.12%
4.71%As of 11/19
5.20%
0.00%
1.00%2.00%
3.00%
4.00%5.00%
6.00%
7.00%8.00%
9.00%
9/3/08 9/10/08 9/17/08 9/24/08 10/1/08 10/8/08 10/15/08 10/22/08 10/29/08 11/5/08 11/12/08 11/19/08
SIFMA
30-year MMD
Impact on Tax-Exempt Market
3.45%
5.74%
7.96%
1.63% 1.82%As of 11/19
1.12%
4.71%As of 11/19
5.20%
0.00%
1.00%2.00%
3.00%
4.00%5.00%
6.00%
7.00%8.00%
9.00%
9/3/08 9/10/08 9/17/08 9/24/08 10/1/08 10/8/08 10/15/08 10/22/08 10/29/08 11/5/08 11/12/08 11/19/08
SIFMA
30-year MMD
Impact on Tax-Exempt Market
9/18/-10/1• Government announces $85 billion 2-year loan to AIG• Investors pull approximately $24 billion from tax-exempt money market funds• Goldman Sachs and Morgan Stanley announce they will become bank holding companies• House votes down first $700 billion federal bailout plan• Largest point drop in the Dow Jones (778 points) after bailout plan fails in the House
• 10/2-10/14• JPMorgan acquires Washington Mutual in a government brokered deal• Senate and House pass revised bailout plan • 30-year Treasuries fall below 4%• Federal Reserve and five other central banks cut interest rates on a coordinated basis• US government announces plan to invest $250 billion in nine US banks• FDIC insurance expanded• Fed announces details on CPFF (Commercial Paper Funding Facility)
3.45%
5.74%
7.96%
1.63% 1.82%As of 11/19
1.12%
4.71%As of 11/19
5.20%
0.00%
1.00%2.00%
3.00%
4.00%5.00%
6.00%
7.00%8.00%
9.00%
9/3/08 9/10/08 9/17/08 9/24/08 10/1/08 10/8/08 10/15/08 10/22/08 10/29/08 11/5/08 11/12/08 11/19/08
SIFMA
30-year MMD
Impact on Tax-Exempt Market
3.45%
5.74%
7.96%
1.63% 1.82%As of 11/19
1.12%
4.71%As of 11/19
5.20%
0.00%
1.00%2.00%
3.00%
4.00%5.00%
6.00%
7.00%8.00%
9.00%
9/3/08 9/10/08 9/17/08 9/24/08 10/1/08 10/8/08 10/15/08 10/22/08 10/29/08 11/5/08 11/12/08 11/19/08
SIFMA
30-year MMD
Impact on Tax-Exempt Market
• 10/14-10/29• Dow experiences worst one-day percentage decline since 1987 on 10/15• Hedge fund withdrawals may hit 25% by year end• The Federal Reserve cuts interest rates 50 bps to 1%
3.45%
5.74%
7.96%
1.63% 1.82%As of 11/19
1.12%
4.71%As of 11/19
5.20%
0.00%
1.00%2.00%
3.00%
4.00%5.00%
6.00%
7.00%8.00%
9.00%
9/3/08 9/10/08 9/17/08 9/24/08 10/1/08 10/8/08 10/15/08 10/22/08 10/29/08 11/5/08 11/12/08 11/19/08
SIFMA
30-year MMD
Impact on Tax-Exempt Market• 10/30-11/19• $700 billion bailout plan shifts from buying troubled mortgage assets to direct capital injections into
financial institutions• Auto industry requests government assistance to avoid bankruptcy• CPI falls 1% from Sept. to Oct., the steepest one month decline in the 61 year history of the index• Jobless claims approach highest level since 1982• S&P 500 falls below 750 and Dow drops below 7500
Current Market Conditions Impact on Debt PortfolioDowngrades of Insurers and Banks
• Higher costs on variable rate debt• Secondary market disclosure on downgrades
Increased Cost/Scarcity of Bank Liquidity Facilities
• Increase in all-in-cost of VRDBs and operating lines
Credit Market “Freeze” • Increase in long-term fixed rate bond rates
Investor Concerns about Credit • Need for more investor education• Wider credit spreads
Dislocation of Bond/Swap Markets
• Higher negative market-to-market of swaps
• Collateral posting may be required
Impact on Debt Portfolio
Impact on Debt PortfolioCurrent Market Conditions Impact on Debt Portfolio
Lower Endowment Market Values
•Bond/credit covenants may be in jeopardy
•Unrestricted net assets will be substantially reduced
Pressures on Broker/Dealers •Higher fees, less willing to inventory bonds, may reduce commitment to municipal business
•Downgrades on counterparties, remarketing agents
Decrease in Fundraising, Endowment Earnings
•Pressure on liquidity
Tuition & Auxiliaries
26%72%
State Support
32 %--
Grants & Contracts
14%1-5%
Investment Income
2%6-10%
Gifts & Other
3%8-11%
More Financial Aid Needed; Decreases in Discretionary
Spending
Decreased State
Appropriations
Fewer Federal, State and
Private Grants
Market Value of Endowment
Down
Decrease in Annual Giving
General Impact of Current Economic Climate on Higher Ed Budgets
Capital Campaigns
Percentages are shown from Moody’s 2007 Medians; publics on top line, privates on bottom for small and large institutions.
Equity Markets State
Revenues Unemployment Federal Deficit
Decrease in Capital Gifts
Polling Question #3
At your institution, what is the biggest challenge you face due to the current economic climate?
a) Dealing with uncertaintyb) Communicating the issuesc) Developing solutionsd) Working with stakeholderse) Other
Debt Management Strategies
Review existing debt structure• Understand portfolio risks (e.g. put, liquidity, counterparty)• Bank line of credit expiration dates• Bond and bank covenants• Establish debt portfolio monitoring system• Review swap portfolio and documents, if any, and MTMs and
collateral thresholds
Governance/Management issues• Evaluate liquidity needs holistically• Consider relationships institutionally to maximize benefits• Diversify and manage relationships with financial partners• Communicate with senior management and Trustees
External communications – Be proactive with investors and rating agencies
Establish liquidity bridges– Potential issues with capital calls/diminished
payout– Midyear state budget cuts– Gifts and timing of pledges
Debt Management Strategies
Potential Opportunities
Streamline operations and improve efficiency• Opportunistic budget reductions• Revisions to capital plans
–Assumptions–Timing
Re-evaluate spending rule impact• Rule vs proactive management• Early cuts vs later
Improve communication across institution (e.g. schools, functions)
Better align asset and liability sides of the balance sheet
Improve Board-management relations to enable faster and more nimble decision making
Potential Opportunities
Polling Question #4
• What is your institution’s bond rating?
– a) Baa– b) A – c) Aa– d) Aaa– e) Not rated yet
The Long & Short of It: Treasury & Debt Management is Key
• Short-Term Challenges• Capital Market Freeze
– Variable rate disruptions– Swap losses– Tighter bank capital– Higher fixed rates
• Liquidity Squeeze– Commonfund ST fund– Reduced distributions from hedge funds & other investments– Higher than expected debt costs– Lower annual fund receipts
• Tuition Pricing Elasticity – Deep, long recession– Shift to lower-cost options– Student borrowing costs
• Credit Now at a Premium – Demand for ratings rising – Demand for better
disclosure rising– Cost of debt higher
The Long & Short of It: A CFO’s Job Just Got a Lot Harder
• Investment Losses– Lower endowment spending– Lower projected returns– Impact on large donors– Impact on student aid
• Capital Program Rethinking– Invest while others defer?– What is strategically critical?– Linked w/ asset/debt policy?
Longer Term Challenges
Credit Spreads Widen Amid Thawing in Short Term Market
Source: Moody’s
How Tight Will Capital Market Access Be for Colleges?
020
406080
100120
140160
5-1-
988-
14-9
811
-27-
983-
11-9
96-
24-9
910
-7-9
91-
20-0
05-
4-00
8-17
-00
11-3
0-00
3-15
-01
6-28
-01
10-1
1-01
1-24
-02
5-9-
028-
22-0
212
-05-
023/
20/2
003
7/2/
2003
10/1
6/20
031/
29/2
004
5/13
/200
48/
26/2
004
12/9
/200
43/
24/2
005
7/7/
2005
10/2
0/20
052/
2/20
065/
18/2
006
8/31
/200
612
/14/
2006
3/29
/200
77/
12/2
007
10/2
5/20
072/
7/20
085/
22/2
008
9/4/
2008
0.001.002.003.004.005.006.007.008.009.00
Baa-Aaa Spread 7 Day VMIG Composite
Risks of Variable Rate Debt No Longer Hidden*
Many College & University CFOs Outsourced Key Decisions
Financial CovenantsFinancial Covenants
Renewal/Rollover RiskRenewal/Rollover Risk
Bank Bond PaymentsBank Bond Payments
Rating Triggers Rating Triggers
Probability
Ma
gn
itu
de
Swap Coll/ TerminationsSwap Coll/ Terminations
*See Moody’s 2004 publication:--“Hidden Risks of Variable Rate Debt”
Frequency & Severity of Risk is Greater
Rating Discussions: What is Moody’s Looking For?
• Full Disclosure– Municipal market information is
fragmented and hard to assess– Higher education accounting: opaque– Higher ed has a great business model,
but undercuts its own credibility with investors by poor disclosure habits
Rating Discussions: What is Moody’s Looking For?
• Senior Leadership Involvement– Strong President/CFO team can allay
concerns about leverage & other risks– Board discussion more important– Frank discussion of risks and
strategies to mitigate– Absence of senior contact is red flag
Rating Discussions: What is Moody’s Looking For?
• Make Your Own Decisions– Using consultants for advice is usually
a best practice– But know your documents in detail– Outsourcing debt/investment
decisions is a red flag
Even Substantial Declines in FY2008 and FY2009 Unlikely To Erase Gains
$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: Additional30% Decline
Med
ian
Cas
h an
d In
vest
men
ts
Source: Moody’s
Endowment Losses: How Big an Impact?
Credit Outlook: Not all Negative
Large endowment losses: tough, but not fatal blow for colleges and universities
~90% of students attend schools w/ < $100K per student
4 year enrollments & up-front payments give time to adjust
Public & lower cost private colleges gain in recession
But less selective, high cost colleges with weak debt structure are @ risk
New strategies needed- diversification of programs; student markets, banks, swap counterparties, investments
Increased rating downgrades likely for those with poor control over decisions
Source: Moody’s
Questions?
Next Steps….
• Be sure you have visited the NACUBO website for more resources and information at:
• http://www.nacubo.org/economy
Thank you!Contact information:
Linda Fan: [email protected] T. Golding: [email protected]
J. Michael Gower: [email protected] Nelson: [email protected]
Michael Strauss: [email protected]
Thank You For Your Participation
Please complete the online evaluation