42

nd A

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ual

Pro

fess

ion

al

Deve

lop

men

t W

ork

shop How Rating Agencies Crunch the

Numbers Peter J. Czajkowski

Director of Public Finance

314-342-2165czajkowp@stifel.com

Credit RatingsMary I. McPike

Vice President314-342-4066

mcpikem@stifel.com

Table of Contents

Credit Ratings Historical Medians Key Ratios Capacity Analysis Credit Packages UPMIFA Proofing Discussion / Questions

Credit Ratings

The Rating Agencies Effect of Credit Crisis

– Bond insurance credit disintermediation – implosion!

– Looking through the credit enhancement

Credit Spreads Proliferation of Products Process

1

2

MMD Spot Rate 30 Year Bond Spread to AAA Pure

0

50

100

150

200

250

7/20

/199

3

7/20

/199

4

7/20

/199

5

7/20

/199

6

7/20

/199

7

7/20

/199

8

7/20

/199

9

7/20

/200

0

7/20

/200

1

7/20

/200

2

7/20

/200

3

7/20

/200

4

7/20

/200

5

7/20

/200

6

7/20

/200

7

7/20

/200

8

7/20

/200

9

Bas

is P

oint

Spr

ead

to A

AA

Insured Spread Aa Spread A Spread Baa Spread

2/3/2010170 bps

2/3/201072 bps

2/3/201051 bps

2/3/201017 bps

3

Historical Medians

4

Historical Total Direct Debt

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

200,000,000

2004 2005 2006 2007 2008Fiscal Year

Dol

lars

Private Total Direct DebtPublic Total Direct Debt

Historical Total Unrestricted Financial Resources

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

2004 2005 2006 2007 2008Fiscal Year

Dol

lars

Private Unrestricted Financial Resources

Public Unrestricted Financial Resources

Historical Unrestricted Financial Resources to Direct Debt

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2004 2005 2006 2007 2008Fiscal Year

Tim

es

Private Unrestricted Financial Resources to Direct Debt

Public Unrestricted Financial Resources to Direct Debt

Historical Debt Service to Operations

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2004 2005 2006 2007 2008

Fiscal Year

Tim

es

Private Debt Service to Operations

Public Debt Service to Operations

Historical Unrestricted Financial Resources to Operations

0

0.2

0.4

0.6

0.8

1

1.2

2004 2005 2006 2007 2008Fiscal Year

Tim

es

Private Unrestricted Financial Resources to OperationsPublic Unrestricted Financial Resources to Operations

Historical Operating Margin

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2004 2005 2006 2007 2008

Fiscal Year

Tim

es

Private Operating Margin

Public Operating Margin

Historical Debt Service Coverage

2.30

2.40

2.50

2.60

2.70

2.80

2.90

3.00

3.10

3.20

2004 2005 2006 2007 2008Fiscal Year

Tim

es

Private Direct Debt Service Coverage

Public Direct Debt Service Coverage

Historical Tuition & Auxiliaries as a Percent of Total Revenues

0%

10%

20%

30%

40%

50%

60%

70%

80%

2004 2005 2006 2007 2008Fiscal Year

Per

cen

tage

Private Tuition & Auxiliaries as a Percent of TotalRevenues

Public Tuition & Auxiliaries as a Percent of TotalRevenues

Private Institution: Unrestricted Financial Resources to Debt

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2004 2005 2006 2007 2008Fiscal Year

Tim

es

AAA AA A Baa

Public Institution: Unrestricted Financial Resources to Direct Debt

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2004 2005 2006 2007 2008Fiscal Year

Tim

esAAA/Aa1 Aa2 A2 Baa

7

Private Institution: Debt Service to Operations

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2004 2005 2006 2007 2008Fiscal Year

Per

cen

t

AAA AA A Baa

Public Institution: Debt Service to Operations

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

2004 2005 2006 2007 2008Fiscal Year

Per

cent

AAA/Aa1 Aa2 A2 Baa

8

Private Institution: Unrestricted Financial Resources to Operations

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2004 2005 2006 2007 2008Fiscal Year

Tim

es

AAA AA A Baa

Public Institution: Unrestricted Financial Resources to Operations

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2004 2005 2006 2007 2008Fiscal Year

Tim

es

AAA/Aa1 Aa2 A2 Baa

9

Private Institution: Annual Operating Margin

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2004 2005 2006 2007 2008Fiscal Year

Per

cen

t

AAA AA A Baa

Public Institution: Annual Operating Margin

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2004 2005 2006 2007 2008Fiscal Year

Per

cen

t

AAA/Aa1 Aa2 A2 Baa

10

Key Ratios

11

Aa Medians A Medians Baa Medians May 31, 2009 May 31, 2008 May 31, 2007Financial StatisticsDirect Debt ($) 313,769,000 148,412,000 73,728,000 95,525,239 95,525,239 95,525,239Unrestricted Financial Resources 749,765,000 139,775,000 27,877,000 101,094,221 126,607,833 102,993,131Expendable Financial Resources 1,251,093,000 200,781,000 48,103,000 121,094,221 144,607,833 115,993,131Total Financial Resources 1,704,297,000 293,930,000 75,329,000 136,094,221 157,607,833 127,993,131Total Cash and Investments 1,695,753,000 336,151,000 97,487,000 185,000,000 217,500,000 187,000,000Total Adjusted Revenues 486,850,000 219,045,000 92,961,000 211,875,000 205,525,000 197,191,667Total Expenses 483,891,000 191,548,000 88,643,000 201,250,000 192,250,000 189,250,000Total Gift Revenues 94,799,000 19,346,000 6,215,000 14,831,239 19,801,764 17,900,447Average Gift Revenue 77,586,000 19,725,000 7,329,000 17,511,150 18,128,816 16,725,757* FY 2009 Total Financial Resources represents a 141% increase over FY 2005 Total Financial ResourcesMarket Data and RatiosTotal Enrollment FTE (#) 8,213 6,264 4,572 15,000 14,730 14,362Change in Total Enrollment (%) 1.1% 1.2% 2.7% 1.8% 2.6% 0.9%Educational Expenses per Student 52,066 26,977 17,456 9,267 9,097 9,261Total Tuition Discount 31.0% 27.2% 23.9% 8.9% 8.9% 8.5%

Capital RatiosUnrestricted Financial Resources to Direct Debt (x) 2.6 1.1 0.5 1.1 1.3 1.1Expendable Financial Resources to Direct Debt (x) 3.2 1.4 0.6 1.3 1.5 1.2Total Financial Resources to Direct Debt (x) 4.6 2.2 1.0 1.4 1.6 1.3Total Cash and Investments to Direct Debt (x) 4.9 2.4 1.2 1.9 2.3 2.0Direct Debt-to-Cash Flow (x) 5.4 5.8 5.7 6.4 3.9 4.5Direct Debt to Total Capitalization (x) 0.1 0.2 0.4 0.3 0.3 0.3Debt Service to Operations (%) 3.5% 3.8% 5.2% 2.7% 2.9% 2.9%General MADS to Operations (%) 5.5% 5.4% 6.0% 2.7% 2.9% 2.9%

Balance Sheet RatiosUnrestricted Financial Resources to Operations (x) 1.5 0.8 0.3 0.5 0.7 0.5Expendable Financial Resources to Operations (x) 2.3 0.9 0.4 0.6 0.8 0.6Free Expendable Financial Resources-to-Operations (x) 1.6 0.2 (0.3) 0.13 0.26 0.11Total Cash and Investments to Operations (%) - Moody's N/A N/A N/A 91.9% 113.1% 98.8%Total Financial Resources per FTE student ($) 229,307 47,358 14,746 9,073 10,700 8,912

Operating RatiosOperating Margin (%) 2.9% 4.6% 4.3% 5.0% 6.5% 4.0%Average Operating Margin (%) 3.7% 4.3% 3.6% 5.2% 3.9% 0.5%Operating Margin Excluding Gifts (%) -4.5% -0.9% -1.2% -4.2% -1.9% -2.6%Average Gifts per Student ($) 13,333 3,273 1,223 1,167 1,231 1,165Operating Cash Flow Margin (%) 12.4% 13.4% 12.5% 8.8% 13.4% 12.2%Change in Net Tuition Revenue (%) 5.9% 6.9% 7.9% 5.5% 8.6% 7.1%Direct Debt Service Coverage (x) 3.7 3.2 2.7 4.0 4.5 3.5General MADS Coverage (x) 2.6 2.6 2.1 4.0 4.5 3.5Series 2001 and 2005 MADS Coverage (x) N/A N/A N/A 5.2 5.8 4.6Average Debt Service Coverage (x) 3.6 2.9 2.6 4.0 3.5 2.2Average General MADS Coverage (x) 2.2 2.4 1.9 4.0 3.5 2.2Return on Net Assets (%) 0.3% -0.1% 2.3% 0.0% 11.1% 16.6%Return on Financial Resources (%) -0.7% -3.4% -1.7% -14.6% 20.7% 0.6%

Contribution RatiosTuition & Auxiliaries (%) 46.8% 74.8% 85.5% 87.9% 83.8% 79.2%Investment Income (%) 14.4% 6.2% 3.4% 3.1% 6.5% 7.4%Gifts (%) 7.1% 5.0% 4.3% 6.0% 4.8% 7.4%Grants and Contracts (%) 9.1% 4.2% 1.8% 0.6% 0.6% 0.6%Other (%) 3.6% 3.2% 2.1% 2.4% 4.3% 5.4%Ratios from the Moody's May 2009 report

General MADS to Operations is particularly low and substantially lower than all the median categories.

PRIVATE UNIVERSITYMoody's Credit Ratios for FY 2008 - Large Universities PRIVATE UNIVERSITY RATIOS

Key Ratios

“Unrestricted Financial Resources” means total unrestricted net assets less net investment in plant– “Net Investment in Plant” means Net Property, Plant,

& Equipment + funds held by bond trustee + deferred bond issuance costs - related debt

– 174,068,982 – (160,000,000 + 7,000,000 + 1,500,000 - 5,525,239 – 75,000,000 – 15,000,000) = 101,094,221

“Unrestricted Financial Resources to Direct Debt” means Unrestricted Financial Resources divided by debt– 101,094,221 ÷ 95,525,239 = 1.1

13

Key Ratios

“Unrestricted Financial Resources to Operations” means Unrestricted Financial Resources divided by total operating expenses– 101,094,221 ÷ 201,250,000 = 0.5

“Operating Margin” means adjusted total revenues less total unrestricted operating expenses, divided by adjusted total revenues– [(211,875,000 - 201,250,000) ÷ 211,875,000] ÷

100= 5.0%

14

Capacity Analysis

15

16

2

CategoryMedian

Ratio WeightingMay 31,

2009May 31,

2008May 31,

2007 A MediansMay 31,

2009May 31,

2008May 31,

2007

Direct Debt Service Coverage (x) 20% 4.0 4.5 3.5 3.2 4,149,827 6,695,890 1,571,739Unrestricted Available for Debt Service (General Debt) (Series 2001) 22,000,000 24,650,000 19,316,667Actual Annual Debt Service (Estimated) 5,525,239 5,525,239 5,525,239

Debt Service to Operations (%) 20% 2.7% 2.9% 2.9% 3.8% 5,761,546 4,833,079 4,523,590Actual Annual Debt Service (Estimated) 5,525,239 5,525,239 5,525,239Total Expenses 201,250,000 192,250,000 189,250,000

Total Cash and Investments to Direct Debt (x) 20% 1.9 2.3 2.0 2.4 (3,688,381) (980,048) (3,521,714)Total Cash and Investments 185,000,000 217,500,000 187,000,000Direct Debt ($) 95,525,239 95,525,239 95,525,239

Unrestricted Financial Resources to Direct Debt (x) 20% 1.3 1.3 1.1 1.1 3,914,558 3,914,558 (379,024)Unrestricted Financial Resources 126,607,833 126,607,833 102,993,131Direct Debt ($) 95,525,239 95,525,239 95,525,239

Expendable Financial Resources to Direct Debt (x) 20% 1.5 1.5 1.2 1.4 1,553,214 1,553,214 (2,534,600)Expendable Financial Resources 144,607,833 144,607,833 115,993,131Direct Debt ($) 95,525,239 95,525,239 95,525,239

100% 11,690,764 16,016,693 (340,009)

Note: Actual debt capacity depends on numerous factors including on the use of funds and project benefits to the school, the structure of the issue, capital fundraising plans and the rating agencies view of the school's competitive position and subjective rating measures.

PRIVATE UNIVERSITYDebt Capacity Analysis - Moody''s Medians for FY 2007

Median Comparison: 1 = Aa; 2 = A; 3 = Baa

Weighted Average Additional Debt CapacityPRIVATE UNIVERSITY RATIOS

Credit Packages

Project Description

Project Essentiality or Proposed Benefits

Preliminary Term Sheet with Clear Description of Collateral Pledges

Sources and Uses for Overall Project

Sources and Uses over Time

Preliminary Timetable

Preliminary Distribution List

Bond Model

Current Fiscal Year Budget

Fundraising Report

Continuing Disclosure Reports regarding the Entity and Parity Debt

Projections and Financial Summary Report

17

Admission Statistics

Last Three Years’ Financial Statements

Overview of Institution: Operation and Management

Draft Bond Disclosure and Official Statement

Draft Indenture

Draft Loan Agreement

Project

Financials

Support Material

UPMIFA Proofing

Earnings on Permanently Restricted Endowments are now classified as Temporarily Restricted until designated by the Board

Historically, these earnings have been classified as unrestricted

18

UPMIFA Proofing

19

From www.upmifa.org

UPMIFA Proofing

Typical Liquidity Covenant language: “Liquidity Ratio” means the quotient (expressed as a percentage) of (i) Unrestricted Net Assets, plus (A) the loss on extinguishment of debt incurred in connection with the refunding of the Refunded Bonds, less (B) net Property Plant and Equipment less the aggregate principal amount of all Outstanding Long-Term Indebtedness divided by (ii) the aggregate principal amount of all Outstanding Long-Term Indebtedness.

Effect: Reduced numerators and technical defaults

20

UPMIFA Proofing

REVISED: “Liquidity Ratio” means the quotient (expressed as a percentage) of (i) Unrestricted Resources, plus the loss on extinguishment of debt incurred in connection with the refunding of any Related Bonds divided by (ii) the aggregate principal amount of all Outstanding Long-Term Indebtedness minus the aggregate amount on deposit in any debt service reserve fund held under any Related Bond Documents.

“Unrestricted Resources” means Unrestricted Net Assets, plus Available Temporarily Restricted Assets, less the difference of net Property, Plant and Equipment and the aggregate principal amount of all Outstanding Long-Term Indebtedness.

21

UPMIFA Proofing

For outstanding debt, borrowers must amend existing bond documents

This may require bondholder or bond insurer approval

To-date, we have not experienced many problems with amendments

22

Questions and Comments

23