Will Admissions Stats At LACs Actually Decline This Year?

Parents Forum
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<p>Don't know about Amherst, but frequently the Variable Rate Demand Notes are backed by bank letters of credit. If the bonds cannot be remarketed then the bank pays off the bondholders , and the college must repay the bank pursuant to some repayment schedule, over some shorter yet non-immediate term. The bank will require levels of liquid cash reserves, but these are not necessarily equal to the amount of the borrowing IIRC. If a bank is not involved, that's different. But if Amherst was unhappy with the required effect on short-term liquidity they could in all likelihood refinance the entire issue with long-term fixed rate bonds to ease the liquidity impact. </p>

<p>A taxable borrowing is not in and of itself sign of any problem; it just means that whatever they are using the proceeds for is not qualified for tax-exempt financing. If they thought their endowment would earn more than the cost of taxable financing they might borrow. Or yes, if they were concerned about liquidity. </p>

<p>Amherst has the right guy on the Board to help consider these issues.</p>

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<p>
[quote]
Don't know about Amherst, but frequently the Variable Rate Demand Notes are backed by bank letters of credit. If the bonds cannot be remarketed then the bank pays off the bondholders , and the college must repay the bank pursuant to some repayment schedule, over some shorter yet non-immediate term. The bank will require levels of liquid cash reserves, but these are not necessarily equal to the amount of the borrowing IIRC. If a bank is not involved, that's different.

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<p>Even when there is a bank backstop, having a VRDB bond issue recalled because it's not marketable in the secondary market is a devastating financial event for a college. The term of the bank backstop loans is usually much shorter than the term of the bond. It's one of the three major areas of concern cited by both the Moody's and NACUBO reports late last fall.</p>

<p>Every college annual report I've seen notes when there is a bank backstop in place for Variable Rate Demand Bonds and the terms of the backstop. Amherst does not note any financial backstop. Here is the full extent of the discussion of their $165 million in VRDB issues subject to repurchase:</p>

<p>"The series F, H, I and J bonds are subject to tender by bondholders. To the extent that tendered bonds cannot be remarketed, the College is required to repurchase the bonds. The College has not experienced an unsuccessful remarketing of its bonds."</p>

<p>Amherst does have a $50 million line of credit in place that expires in 2011 and would cover at least one of the bond issues in the unlikely event it were to be recalled. Williams has specific bank backstop agreements backing up their VRDBs. </p>

<p>There have been a few colleges that have been forced to buy back VRDBs during the crash. It's ugly because they have to be repurchased (we are talking millions of dollars cash money) within hours.</p>

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But if Amherst was unhappy with the required effect on short-term liquidity they could in all likelihood refinance the entire issue with long-term fixed rate bonds to ease the liquidity impact.

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<p>Correct. That's why several colleges I've looked at set about replacing all their variable rate bond issues with fixed rate bonds in 2007 and 2008. Swarthmore, for example, converted its last VRDB to fixed rate in May 2008. They saw the credit freeze coming and wanted out of the daily auction requirements. It's not just that the bonds are subject to recall, but some colleges saw their interest rates on this daily auction bonds spike to has high as 12% in October. Right now is bad time to be trying to issue college bonds.</p>

<p>Having said that, Amherst's AAA Moody's credit rating means that it is unlikely any of their VRDB issues will be unmarketable in the daily auctions, forcing a buy back. As a practical matter, the impact is vulnerability to interest rate spikes and the need to cover the potential obligation of a buyback in managing their cash liquidity. In other words, the VRDB commitments, even though unlikely to come to fruition, impact the cash availability for the private equity cash call commitments.</p>

<p>
[quote]
A taxable borrowing is not in and of itself sign of any problem; it just means that whatever they are using the proceeds for is not qualified for tax-exempt financing. If they thought their endowment would earn more than the cost of taxable financing they might borrow. Or yes, if they were concerned about liquidity.

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<p>Correct. However, it is very unusual for huge endowment liberal arts colleges to issue taxable bonds. I cannot find any record of colleges in Amherst's financial category having ever done so. It's just too easy to find a "routine" large capital project and issue tax exempt bonds for that, freeing up cash for other needs. Large universities do so with more regularity, although Columbia just issued its first taxable debt in more than a decade.</p>

<p>Amherst is in a bind with these cash call obligations. The only way they can raise large chunks of cash to cover these is to sell the remaining liquid portion of the endowment and there's only $400k to $500k that is even marketable right now. And, to the extent they do that, they put the endowment in even more jeopardy with even more sunk into unmarketable investments. </p>

<p>By contrast, Williams and Swarthmore have $265 million and $223 million in cash call commitments respectively -- half of Amherst's obligation. Both Williams and Swarthmore have to deal with reduced budgets from endowment declines (and both will be cutting into bone and muscle), but neither has liquidity cash flow issues. Swarthmore got out of the Common Fund, converted all of its bond issues to fixed rate, and moved 15% of the endowment into cash and T-Bills by the June 30, 2008 fiscal year end. </p>

<p>I am not, in any way, suggesting that Amherst won't weather the storm. It is one of the most heavily endowed liberal arts colleges in the country with trememdous financial resources. I'm just saying that they are in a much stickier wicket from a cash standpoint than their closest peers.</p>

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<p>
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Does anyone (interesteddad?) know how Grinnell stands in comparison with other deep-pocketed LACs? I know they've posted on their website, but idad seems to have access to more detailed info.

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<p>I only know from reading the June 30 Year End financial reports that have been posted over the last two months or so. Most were finalized after the October crash and were updated with either forward looking management discussions and/or "notes" to the financial statements that deal with the pertinant issues (variable rate demand bonds, CommonFund assets, cash call commitments, endowment spending policy, etc.).</p>

<p>Grinnell should be fine. They started with the second largest per student endowment of all LACs and, relatively speaking, their operating budget is on the low side. I do suspect that they may end taking the boobie prize for the biggest endowment hit. Their endowment had already shrunk by 14% in the fiscal year that ended in June -- before the crash. They had already fallen back behind Amherst and Swarthmore in per student endowment by June. I haven't seen their more recent investment report, but on June 2007, they had 32% of their marketable equities in the financial sector. Very small cash and bond allocation, under 5%. Ouch.</p>

<p>It's really hard to say for sure on endowments because everybody is playing hide and seek on the valuations of their private equity, hedge fund, and other non-marketable equity investments. Harvard has fessed up to a 30% loss, but there have been articles quoting sources familiar with the Harvard investment office that say the actual losses may be 50% when all is said and done. We are talking about huge investments in private equity positions that can't be sold. Harvard tried to sell off $1.5 billion of private equity investments and gave up when the offers were coming in at 35% discounts.</p>

<p>Grinnell has $296 million in cash call commitments and $110 million in outstanding bond issues (all VRDB). Moody's AAA bond rating.</p>

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<p>(wondering if Interested Dad isn't alan greenspan)</p>

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<p>LOL^</p>

<p>Yeah. I am very impressed... although my understanding of what interesteddad and monydad are talking about is limited. ;)</p>

<p>I do have a kid at Amherst, however, so I read on attentively.</p>

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<p>^^^^ Moda - Ha!!</p>

<p>Seriously, interesteddad and/or monydad, you could have quite the niche blog that delved deep into the financial standings of individual colleges right now, that could draw quite a fair share of attention.</p>

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<p>"Having said that, Amherst's AAA Moody's credit rating means that it is unlikely any of their VRDB issues will be unmarketable in the daily auctions, forcing a buy back."</p>

<p>1) IIRC, Moody's does not asssign AAA, it would be Aaa
2) Aaa is a long term rating, the rating at least equally pertinent to the unmarketability of (usually weekly more often than daily, don't know about Amherst's debt specifically) auction would be a short term rating, eg. V-MIG-1 etc., which would be given in addition to a long term rating for a variable rate demand obligation. The short term rating is particularly germane here because it assesses short term liquidity and credit, rather than eventual repayment over the long term.</p>

<p>If they chose self-liquidity + line over bank LOC they must have been comfortable, at the time, they would have that liquid cash routinely laying around; the use of short term/variable rate debt was possibly used to appropriately match nature of assets with liabilities. Or just to get (usually) lower rates. But if things change in this regard, they may well need to change as well, as you've said the others have done.</p>

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<p>Thanks to IDad & MDad for all the financials. </p>

<p>With Amherst I know that dorm(s) were recently built or renovated. As I recall, there are/were plans to upgrade the science facilities. I saw part of it a couple years ago & could see the need.</p>

<p>Do either of you have any thoughts about Amherst issuing non-taxable bonds to meet their science facility needs. I assume it's tabled now, but at some point they do need the upgrade to attract students.</p>

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<p>Sometimes a long-lived capital project, that ought to be financed to match payment with its useful life, i.e. matching assets vs. liabilities, does not happen to qualify for tax-exempt financing. I think some housing can be like that, but don't hold me to that.</p>

<p>I'd have thought a science facility, being directly related to its mission, would qualify for tax-exempt financing; ie it's function is part of the essential mission of this 501c3 tax-exempt educational institution. But what do I know.</p>

<p>If it has to be taxable, and they decide it ought to be financed, then they'll finance it. It's just a matter of a higher interest rate.</p>

<p>It's possible that the project does qualify for tax-exempt funding, but there's some sort of issuance cap in effect. In which case, they might finance taxably at the start, and then refinance with tax-exempt if they get some cap allocation down the road. Maybe. I don't know if this last paragraph applies here, really. Some types of borrowers had to deal with this sort of thing, but don't know about colleges.</p>

<p>But there's nothing wrong with taxable borrowing, per se,companies all over do it all the time. It just costs more. 501c3 institutions frequently don't have to, because of tax laws, that's all. But sometimes they do. It's not about their credit-worthiness, it's about the tax laws governing what they can finance tax-exempt.</p>

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<p>
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Moody's does not asssign AAA, it would be Aaa

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<p>Correct. My bad. Point being that there are only six liberal arts colleges with the top long-term credit rating (Aaa) from Moodys:</p>

<p>Amherst
Berea
Grinnell
Pomona
Swarthmore
Wellesley</p>

<p>So, I don't think Amherst is at any great risk. I do think their liquidity issues (which are relatively worse than their peers) are going to force them to make relatively more drastic steps (such as issuing taxable debt for address liquidity issues).</p>

<p>There are other colleges with different issues. For example, when you move out of the very top tier, you find colleges that were already spending above their policy limits from the endowment. A college that was at the low end of their spending policy (say 4% of endowment per year) can increase that by 25% (to 5% of the endowment) and offset a 25% decline in endowment value. As it turns out, 25% is probably not enough to fully cushion this market collapse, but it takes a lot of the pressure off. A college that was already spending 6% or 7% from the endowment during the good years has no cushion and has to cut expenses deep and fast.</p>

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<p>Amherst's dorm renovations were financed with tax-exempt bond issues. Every building project at Amherst, Williams, and Swarthmore going back at lest a decade has been financed with tax-exempt bonds.</p>

<p>The science center at Amherst was planned to be financed the same way, as was the new libarary at Williams. These projects were all put on ice, in part, because the market for issuing new tax-exempt bonds became difficult and unattractive during the October credit freeze. There were just no buyers for bonds.</p>

<p>I do not expect any of the major projects to be rekindled for some years (at least three). IMO, the colleges have accepted that today's endowment levels are the new reality and are in the process of putting in place three-year plans to reduce spending accordingly. Donations are also down.</p>

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<p>Q: If there are no buyers for their tax-exempt borrowings why are there any buyers for their taxable borrowings ? the credit & rating processes of investors & rating agencies do not much much differ based on tax exemption alone.</p>

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<p>I've spent the AM reading the financials. Wow. Had not focused on the depth of the problems, interesting, aggressive money managers at some of these institutions.</p>

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<p>
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Q: If there are no buyers for their tax-exempt borrowings why are there any buyers for their taxable borrowings ? the credit & rating processes of investors & rating agencies do not much much differ based on tax exemption alone.

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<p>The credit markets have thawed since October. However, I don't think any colleges want to be taking on additional debt at this time. Science Centers and Libraries are optional. If Amherst decides to issue taxable debt to cover liquidity issues as they have suggested will happen, it is almost certainly not debt they want to take on. They are sitting on an endowment that is illiquid.</p>

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<p>In that case I'd have thought they'd be fixing out the VRDNs, which would relieve some of the strain on short term liquidity and would not consitutute additional debt.</p>

<p>Though if the market is normal now they may be paying a very low interest rate on them again, which might make them tempting to keep.</p>

<p>Whatever..</p>

<p>Hmom, go pitch them a refi deal. Can't hurt.</p>

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<p>Now you guys get some inkling about the types of things some of these evil, blood-sucking investment bankers might be doing on a daily basis..</p>

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<p>Here's a series of special reports on higher ed in chronological order from Moody's, starting with an overview of the challenges from the crash last October.</p>

<p>This first one is a terrific primer:</p>

<p>Moodys</a> Impact of the Credit Crisis and A Weaker Economy on U.S. Higher Education</p>

<p>Moodys</a> Risks of Variable Rate Debt No Longer Hidden</p>

<p>Moodys</a> U.S. Higher Education Outlook</p>

<p>This one is useful. It's from October, basically saying that the closing of the CommonFund shouldn't result in many bond rating changes. The interesting part is that the appendix has the Moody's long term bond rating for a very long list of colleges and universities. Not all of them, but a lot.</p>

<p>Moodys</a> Commonfund Short Term Fund Credit Impact:</p>

<p>And, this one from NACUBO is another overview of things to watch for in college finance:</p>

<p><a href="http://www.nacubo.org/documents/Impact%20of%20the%20Economy%20on%20Higher%20Education.pdf%5B/url%5D"&gt;http://www.nacubo.org/documents/Impact%20of%20the%20Economy%20on%20Higher%20Education.pdf&lt;/a&gt;&lt;/p>

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<p>I'm looking at this purely as a mom and a soon to be employee of a University, my rainmaking days are over!</p>

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<p>
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In that case I'd have thought they'd be fixing out the VRDNs, which would relieve some of the strain on short term liquidity and would not consitutute additional debt.

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<p>They often have interest-rate swap agreements to "hedge" the interest rates on the variable rate bonds. For reasons that are way above my pay grade, it is apparently hideously expensive to buy-out the interest rate swaps right now. Harvard just spent $300 million of the $1.5 billion they borrowed buying out from under rate swap agreements.</p>

<p>I believe that the current rates on the VRDBs are extremely tempting to keep, but with signficant risk of another round of credit freeze.</p>

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<p>in best case, such swap arrangements might be disclosed in some form as well, perhaps in footnotes.</p>