Risks for Higher Ed from variable rate debt revealed by credit crisis

Standard & Poors
New York, December 22, 2008 -- For U.S. colleges and universities, the credit risks associated with variable rate debt have been exacerbated by the ongoing credit market and municipal bond market disruptions, says Moody's Investors Service in a new report that highlights the importance of careful and proactive management of variable rate debt by colleges, especially those with lower credit ratings.

"Monitoring an institution's management of its variable rate debt portfolio has become increasingly crucial as colleges and universities use variable rate debt more frequently, heightening their exposure to short-term risks associated with the debt structure such as volatile interest rates, accelerated bond payments, or collateral posting on swaps," said Margot Kleinman, author of the report.

She said that the troubling characteristic of most of these risks is the severity of the impact should the event occur. "The credit quality of a Baa-rated college with limited liquidity could deteriorate rapidly--essentially overnight--and lead to a multi-notch downgrade if the college is required to make accelerated payments on bank bonds or is unable to rollover a bank liquidity agreement."

"As a result, understanding of the detailed terms of counterparty agreements is critical to successfully manage the risks," said Kleinman, whose report also outlines Moody's approach to credit analysis of institutions with variable rate debt. Key areas of focus are: budgeting and cash flow, balance sheet liquidity, terms of bank liquidity agreements, and management's assessment of debt structure risks.

Moody's reports that, as of last year, 73 percent of Moody's-rated private colleges and universities were issuers of variable rate debt, and 29 percent of those institutions issued at least 50 percent of their bonds in a variable rate mode.