introduction to the bond rating process october 16,...
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“Bonds 102”
Introduction to the Bond Rating Process October 16, 2014
• OSU’s debt issued through the State benefited from the State’s general
obligation bond rating. • OSU has not previously requested its own independent rating. • Rating agency opinions help investors gauge the relative risk and therefore
determine the value and interest rate of bonds in the municipal market. • Three major credit rating agencies offer forward-looking opinions about
the ability and willingness of an issuer to meet its financial obligations in full and on time:
o Standard & Poor’s Corporation (“S&P”)
o Moody’s Investors Service (“Moody’s”)
o Fitch Ratings (“Fitch”)
Establishing OSU’s Bond Rating
Slide 1
• Each of the credit rating agencies has its own approach to evaluating the credit risk of public university credits.
• All agencies use a combination of qualitative and quantitative factors to assess the credit quality.
• Credit ratings are assigned only upon request by an issuer of bonds, typically at the time a new bond is being sold.
• Each rated issuer is subject to annual surveillance.
• Costs associated with a bond rating that are paid by the university:
o A fee at the time of bond issuance
o An annual surveillance fee
Credit Rating Process
Slide 2
• When new bonds share a lien with outstanding bonds, all “parity obligations” will carry the same rating. Therefore, any rating change (whether upward or downward) would apply to new and outstanding parity bonds.
Moody's S&P FitchAaa AAA AAAAa1 AA+ AA+Aa2 AA AAAa3 AA- AA-A1 A+ A+A2 A AA3 A- A-Baa1 BBB+ BBB+Baa2 BBB BBBBaa3 BBB- BBB-Ba1 BB+ BB+Ba2 BB BBBa3 BB- BB-B1 B+ B+B2 B BB3 B- B-Caa1 CCC+Caa2 CCCCaa3 CCC-Ca CC
CC D DDD\ \ DD\ \ D
Definition
Inve
stm
ent G
rade
Highest quality, lowest default risk
High quality, very low default risk
Upper-medium grade, low default risk
Medium-grade, low default risk
Spec
ulat
ive
Grad
e
Speculative, elevated vulnerability to default risk
Speculative, material default risk is present
CCC Very High credit risk
CCC High likelihood of default
In default
Credit Rating Process
Slide 3
Rating agencies will perform a holistic review of OSU and its component units:
Holistic Credit Review
Slide 4
OSU Credit Rating
OSU Foundation
and Agricultural Research
Foundation Performance
State of Oregon
- Funding Level
- Economic Outlook
Market Position
Enrollment Selectivity
OSU Long-term Strategy
and Goals Governance and
Management
Research Federal, State
and Local
Land-grant, Sea-grant,
Space-grant and Sun-grant
OSU Balance Sheet and Operating
Performance
• All rating agencies use a combination of qualitative and quantitative factors to assess credit quality.
• Key qualitative factors: o Background and history of the issuer
o Political and regulatory environment
o Management quality, experience, track record, and attitude toward risk
o Management and governance structure and communication
o Overall strategy and philosophy, strategic plan
• Need to convey: OSU is a land-grant institution with Carnegie Foundation’s top designation for research institutions and its prestigious Community Engagement classification, a long operating history, a highly regarded president and management team, and a well-qualified Board of Trustees.
• Qualitative factors can influence the rating.
Rating Approach – Qualitative Factors
Slide5
• Shown to the right are quantitative factors considered by Moody’s Investors Service.
• Based on FY 2013 financial statements, the quantitative factors alone indicate an Aa3 rating of the University.
Operating Revenue, 10%
Primary Selectivity, 5%
Primary Matriculation, 5%
Net Tuition per Student, 10%
Average Gifts per Student, 5%
Operating Cash Flow Margin, 10%
Average Debt Service Coverage, 10%
Revenue Diversity, 10%
Total Cash and Investments, 10%
Expendable Financial Resources to Direct
Debt, 5%
Expendable Financial Resources to
Operations, 5%
Debt to Operating Revenues, 5%
Monthly Days Cash on Hand, 5%
Monthly Liquidity to Demand Debt, 5%
Rating Approach – Quantitative Factors
Slide 6
• The rating agencies will be invited for an on-campus visit to tour the campus and meet with the President, Vice President for Finance and Administration, and executive management team.
• A key timing element is having audited FY2014 financials available at the time of the on-campus visit.
October 2014 November 2014 December 2014 January 2015 Spring 2015 Rating Process *
Preparation of Rating Material
October 16-17, 2014 OSU Board Meeting
Rating Agency On campus visit
Receive Private Ratings
January 15-16, 2014 OSU Board Meeting
Receive Public Rating
10-30 days prior to sale
Bond Sale
Update rating material
Request Public Rating
Timeline
Slide 7
Fall 2014 (in process)
* Tentative – actual timing will depend on target date for bond issuance.
Questions?
Slide 8
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