Going out for a credit rating puts chief business officers in the role of the ringmaster, who must coordinate the communication of a higher education institution’s entire history, culture, and vision to a third party in the course of a few hours. For a CBO seeking a rating for the first time, or for new team members participating in their first periodic review, the process can be daunting.
But it’s one that more colleges and universities are expected to undertake over the next several years. In our work at Robert W. Baird & Co., a national firm that provides investment banking and capital planning services for higher education, we’re seeing delayed capital projects coming back on line in a financial environment far different than the market five years ago. Today, letters of credit are less likely, bond insurance is virtually unavailable, and banks—especially smaller community institutions that often serve nonurban schools—are scrutinizing the risk of having large percentages of their lending capacity committed to a single borrower. In July, Standard & Poor’s (S&P) reported seeing a sustained flight from variable-rate demand bonds and bank ratings to unenhanced long-term debt. Savvy schools will be comparing the cost of capital from sources that may be new to them.
For that and many other reasons, colleges and universities must do their homework as they prepare to present their institutions in the best possible light.
Crafting Message and Meaning
A rating agency endeavors to understand the institution’s complete credit profile in the context of regional and national market conditions, with the intent of communicating the school’s creditworthiness to potential investors.
“Our goal is to genuinely understand the university or the school and its credit profile,” says S&P director, Jessica Matsumori. “We’re not there to catch people off-guard.”
CBOs will expect to present historic and projected financial data, but one of the most critical moments in the rating review process is the initial on-campus meeting, during which campus leaders will present the institution’s entire credit profile—and personality—to the rating agency. This presentation can last two to five hours, will generally include a campus tour, and will require that every member of the presentation team know his or her role and facts backwards and forwards. The vice president for finance generally serves as the coordinator of this team and is tasked with managing a cohesive story with multiple narrators, and making sure no chapters are left out.
Experience points the way to some important steps in articulating a persuasive narrative.
Tap perspective and expertise. “The hard part,” says John Nicholas, who retired in May from his position as vice president for administration and treasurer at Beloit College, Beloit, Wisconsin, after 40 years in higher education, “is getting the conversation turned from an internal one, where you know what’s going on and you know the jargon and you know the history, to an external one.”
Rating agency representatives and institutions agree that the most productive meetings are those in which the person most familiar with a question is either in the room or on the phone to answer it. This means ensuring that relationships are strong and communication is open among the CBO; the president; the endowment, enrollment management, and development managers; provost; board leadership; and other players who will provide context beyond the financials.
“These are people you need to help you do this,” says associate vice president for finance Mary Lou Austin, Marquette University, Milwaukee. Austin explains that she developed strong relationships with her enrollment and advancement people and expressly told them which data to focus on as most important and what she wanted them to contribute to the conversation. She herself usually speaks the least, although every number and fact in Marquette’s presentations receives her review.
Ensure that all presenters are up to speed. If relationships are not yet strong, or if there are new and less-experienced team members, conduct early one-on-one meetings with key members of the senior management team. The process can help get buy-in on messaging and direction and help influence other contributors, says Sena Landey, vice president for finance, Earlham College, Richmond, Indiana, who has been through four bond ratings with two rating agencies.
CBOs might need to dust off their finance textbooks. Landey says of the rating process: “It has its own vocabulary. That was the first thing I remember learning.”
Include financial information and much more. Credit rating presentations tend to follow an agenda that flows from a big picture into specific elements such as fund-raising, overall financial health, market position, enrollment statistics, and tactics to manage sectorwide concerns, such as endowment protection, an increasing need for risk management, and strained revenue sources. Contributions from academic leaders will also be helpful in explaining how they expect, for example, changes in major offerings or other key academic initiatives to affect the institution.
Much of the content prepared will obviously be financial, but a good portion of an in-person evaluation will focus on management style and vision, an approach that can come as a surprise to first-timers. “I’m selling Marquette,” Austin says. “I’m not selling Marquette’s financials. If it was just financials, they wouldn’t have to come visit.”
Rating agencies are following current trends, including the potential effects of sequestration, especially at large research universities; online courses; and technological advances. In addition, says Faiza Mawjee, Moody’s associate analyst, the agencies are paying attention to accreditation sanctions, which have picked up in the past few years because of public and political scrutiny.
Establish a clear order. Beloit’s Nicholas recommends starting the presentation by talking through the school’s history, starting with the time frame that makes the most sense for the message. Beloit, for example, nearly went bankrupt in the 1980s, so he discusses what the college has accomplished since then. If a school had a 30 percent enrollment decline at some point in the past, he says, explain how it recovered. Explain whether national trends have been minor blips to performance, or major wallops.
Your story doesn’t have to be all positive, and likely shouldn’t be. “I would say be honest, even if it’s not a very positive thing,” Nicholas says. “You’re exposing a weakness? Expose it. You’re filling out the context of your story.”
All eyes will be on the president to evaluate how the leadership and management team work together to fulfill their goals. “They really do look at the management. Their style, their vision, where they are taking it,” Marquette’s Austin says. Moody’s, in fact, recently updated its rating methodology that explicitly allows for the incorporation of qualitative data, such as management strength and vision, the power to move a credit rating up to three notches above or below the rating recommended by financial data—or from investment-grade to speculative.
Marquette went into its latest credit rating presentation with a brand-new president who had limited financial background. “I could do all the financial stuff in the world, and he could blow it,” Austin says. With a strong grasp of the rating process and a skill for building a story out of a history, however, he gave what Austin called an applause-worthy speech that precisely encapsulated Marquette’s challenges and accomplishments.
Rehearse the performance. Once the team has developed a cohesive message and everyone knows what they are contributing to the story, practice telling it. “We actually stood up and walked through it as though Moody’s was in the room,” Austin says. “If you go through it once, it’s much easier when you go through it a second time.”
And that presentation you’re practicing? Send a copy along to the rating agency meeting participants ahead of time. “Sometimes we’re getting it the night before or when we’re hopping on a plane,” says Colin Walsh, director, Fitch Ratings. Agency analysts do what they can to prepare ahead of time, but delays in receiving content from the college or university can draw out the overall timeline and potentially delay a bond sale.
An Attentive Audience
A school’s financial adviser or investment banker will generally help guide the process and likely be involved in determining whether to opt for a credit rating and from which agency. That is why experienced campus financial leaders recommend that the first step is to build a team with knowledgeable outside experts, starting with your investment banker or financial adviser and continuing with the various attorneys and other players.
The three rating agencies each have their own strengths as they relate to higher education. Moody’s and S&P rate more schools than does Fitch, and all three differ in how they analyze the information they request. The financial bars a school must clear to meet investment-grade standards will differ depending on the agency chosen: S&P and Moody’s, for example, apply separate sets of financial medians to public and private schools, while Moody’s recently updated its methodology to put more emphasis on management and governance.
The higher education institution’s financial adviser or investment banker should have experience working with each rating agency, know their relative strengths as they relate to the school’s needs and geography, and recommend the most appropriate agency for the situation.
Colleges and universities that have earned credit ratings realize that maintaining the ratings is no passive exercise; proactive management of the rating is required to ensure that the school is best representing its most current environment and identity to the investing community.
S&P’s Matsumori says she appreciates it when campus leaders call between annual reviews to let her know small details that may exert large impact. For example, one school called to let her know that application numbers might drop because the school had added an essay component. “If they call us and it’s not something that’s a credit impact, that’s fine,” she notes. “We would rather have more conversations than fewer.” Regular contact, she adds, builds trust in what is truly a long-term relationship.
Some major issues are occasionally forgotten: Schools that hold a credit rating, for example, may issue additional debt years later through a different method, but neglect to let the rating agency know that their balance sheets have changed. The agency will eventually learn about the change in its annual review, but the lack of an update goes to the trust issue, Matsumori says. Fitch director Joanne Ferrigan concurs, adding that if something significant has occurred, she’d much prefer to hear it directly from the school than from the news media.
Annual or periodic reviews can often be completed with a phone call, but the relevant presentation team members from the in-person meeting should still be on the line. All three agencies agree that the most productive reviews are those where all answers can be provided at the time the questions are asked. One way to better ensure that situation is to review the questions the agency sends ahead of time. If no questions or guidance has been sent, the CBO and other leaders can be proactive by requesting the advance information, Moody’s Mawjee suggests. Schools always have the option of requesting an in-person review, which, though not always possible, is especially helpful if there has been a leadership or major financial change.
Some Final Words
While smaller schools will be less likely to achieve a high investment-grade rating, the current market is very favorable for debt issued with middle investment-grade ratings, the level at which the vast majority of rated institutions fall. Investors are eager to buy bonds with the comparatively higher returns provided by the midlevel ratings, but these comparatively higher interest rates are still very affordable to borrowers at the moment.
When strong relationships are in place among the presentation team, and maintaining a strong credit profile becomes part of ongoing conversations, then rating reviews and requests for reviews of new debt become part of what schools do every day, only with an audience. But familiarity should never breed complacency.
“I don’t think it gets easier. This is a command performance, and you’ve got to be at the top of your game,” Austin says. “It’s way too important to take it easy.”