Cash Crunch

To retain current bond ratings or avoid reviews, colleges will need to prove they have ready access to cash, Moody's reports.

May 1, 2009

Colleges now face “unprecedented” financial challenges and will need to demonstrate ready access to cash or risk downgraded bond ratings, Moody’s Investors Service announced today.

The increased strain on most college endowments, which have declined by 30 percent or more at many institutions, has left many finance chiefs and investors wondering whether ratings downgrades will cascade across higher education, making it even more expensive for colleges to borrow money in a tightening credit market. Moody’s, which rates about 500 colleges, has responded to those concerns by defining new thresholds that are likely to trigger reviews or downgrades.

Not surprisingly, Moody’s officials are carefully monitoring colleges’ readily available cash levels or liquidity. Institutions that invested heavily in more complex or long-term strategies, including private equity, have less cash on hand and potentially face a liquidity crunch. In its new report, Moody’s signals that colleges may need to tweak investment strategies, insuring they have sufficient access to funds in order to sustain current bond ratings.

“What’s probably happened is more of a shift in emphasis,” said Roger Goodman, vice president and senior analyst at Moody’s. “I don’t think it’s going to be a surprise to say that liquidity and debt structure risks are more heavily weighted.”

Moody’s Report, “U.S. Colleges and Universities Rating Roadmap,” lays out a series of specific metrics the agency will be analyzing, particularly for private colleges where the risk is considered most acute. The report declares, for instance, that institutions with moderate credit risk – rated “Baa” – should have enough unrestricted dollars on hand to cover at least 70 percent of so-called “puttable debt.” Puttable debt refers to variable rate debt with provisions that allow for investors, in certain circumstances, to demand immediate or accelerated payments.

The prospect of banks requiring universities to pay off 30-year bonds immediately is considered unlikely, but it may make sense if a college is in a deteriorating financial position.

“That’s why it matters to us,” Goodman said. “It is possible.”

Moody’s report also lays out metrics for analyzing cash flow at colleges, and the agency has set specific thresholds for tuition revenues. The agency advises, for instance, that colleges with the highest available rating – Aaa – need to grow net tuition revenues or research grants by at least 2 percent. The goals are more modest for colleges with moderate credit risk. Moody’s report suggest Baa-rated colleges can retain current ratings if they stave off tuition declines of more than 2 percent, an acknowledgment that some decline is likely for such colleges.

Colleges that fall below one of the thresholds established by Moody’s will not necessarily trigger a new review, unless they fall well below the standard. Falling below metrics in multiple categories, however, will make a new review – and potential downgrade – more likely.

While the report mostly looks forward to actions Moody's may take in the coming year, the agency does spend some time looking back at the actions some colleges took in recent years that made them more vulnerable in the economic downturn. By mimicking the investment strategies of the nation’s wealthiest institutions, some colleges put themselves at greater risk, the report states.

“For many debt issuers in this sector, following the investment practices of the largest endowments has been risky and reflective of questionable governance oversight, as most institutions lack adequate staff and risk monitoring resources necessary for overseeing private investment managers,” the report says. “However, for most issuers the large losses will still not tip them into financial stress due to their low dependence on endowment-based revenue.”

To obtain a complete copy of the report, e-mail


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