Wall Street is watching: enrollment, retention and tuition aren't just an academic concern

Black Issues in Higher Education, June 27, 1996 by James C. Lawson

Graduation ceremonies

are over

and a new freshman

class is only weeks

away from orientation.

As another campus

metamorphosis begins,

student classes are

clear evidence of a

university's realization

that building enrollments

and promoting

graduation rates are

only a small measure of their success.

Their true test is how well they can

impress Wall Street.

Often the least visible sign of a

university's image and academic strength,

its bond rating is as much a part of the

university as its fight song, school colors

and alma mater. More than anything, it is

the most telling sign of an institution's

financial muscle.

Although more firms are getting involved

in the rating process, the ratings

that count the most are issued by Moody's

Investors Service Inc., Standard & Poor's

and Duff & Phelps. Their reports are the

most respected. When they evaluate an

institution, investment bankers and investors

pay strict attention.

Ranging from an excellent AAA to a

less-than-investment grade level BBB-,

these ratings can significantly affect the

cost, value and yield of the general obligation

and revenue bonds an institution

issues to build that new library, fieldhouse

or other capital project. Generally speaking,

the higher the rating, the lower the

interest universities will have to pay to

borrow money through bond issues.

Monitoring Investments

Traded in $1,000 and $5,000 denominations

college bonds, like other tax-free

municipal bonds, are long-term investments

that allow individual and institutional

investors to diversify and hedge

their portfolios. They pay a guaranteed

fixed interest rate 10 to 20 years in the

future, investors like them because they

are stable investments that offer the same

performance rates, despite changes in the

economy.

As low-risk debt instruments, higher

education bonds are considered relatively

safe investments, Wall Street analysts say.

Historically, colleges have rarely defaulted.

But as more universities are beginning

to invest portions of their own

portfolios in highly risky investments called

derivatives, Wall Street and the Financial

Accounting Standards Board, are

taking steps to monitor those investments

more closely.

The financial ratings firms have

developed a sophisticated system

to evaluate schools. Standard &

Poor's, for example, examines an

institution's complete financial operation

plus such factors as state

support and a school's ability to

win government grants.

Endowments Big Factor

Endowments are another prime

factor. Harvard and the University

of Texas, for example, are popular

bond issuers among investors "because

they have large endowments,"

explains a prominent. Wall Street

municipal bonds experts. Declining

to be quoted by name because of

company policy, the analyst notes

that these schools have proud

alumni who are big contributors.

"Everybody wants them and it

doesn't matter how much they cost."

Two years ago, when Spelman

College wanted to build a new academic

center and science facility,

Wall Street welcomed the

Atlanta-based college with open

arms. Standard & Poor's gave its

$22.5-million package an A+ rating

and said the college had a stable

financial outlook primarily because

"the college maintains a high level

of liquidity. Unrestricted endowment

monies and available resources

will cover the outstanding debt by

1.5 times."

Spelman's liquidity in part came

because of the $20 million gift TV

personality Dr. William Cosby and

his wife, Dr. Camille Cosby, made

to the school.

Standard & Poor's touted

Spelman for its market niche as a

"high quality liberal arts institution

for Black women; a strong management

team; above-average student

quality with SAT scores of incoming

students at 1002 plus strong growth

in student demand; and strong

fund-raising capability, resulting in

endowment growth of 117 percent."

While ratings are extremely important,

there have been some exceptions,

especially when a big

name university with large endowments

are involved. "I've seen some

lower credits trade better than their

ratings," says a bond trader who

asked not to be named. "For example,

a BAA rated facility may

trade like a [higher rated] A-1 facility

because investors feel good about

the credit and they feel confident

about the institution behind the

bonds."

Other Factors

Mary Peloquin Dodd, a director

with Standard & Poor's public finance

group, says that another key

factor is whether a school is filling

its freshman class by lowering admission

standards -- a possible sign

of declining demand for its educational

product.

The firms also watch for matriculation

rates and the presence

of nationally recognized academic

programs. For example, Harvard

University holds Standard & Poor's

top rating of AAA. Seven others -- Amherst

College, California Institute

of Technology, Massachusetts

Institute of Technology, Stanford,

Princeton, Yale and Rockefeller University

(NY) -- are on that prime

list, which makes their bonds attractive

investments. A Harvard

bond with a 5.50 coupon rate, is

expected to pay 6.35 percent upon

maturity in 2015.

A long tradition for fiscal

strength and public image counts

for a lot on Wall Street. But size is

not important and the university