S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Higher Educationtial demand for housing. If demand for on-campushousing is weak or non-existent, and the university’slong-term rating is low investment grade, it isunlikely that any proposed financing will achievean investment grade rating without a very substantiallink to a sponsoring institution. Conversely, ifhousing demand is strong, and the proposed projectis being used to replace existing housing, the projectwould be viewed favorably. A substantial linkmight be a college guaranty of debt service or anunconditional lease vacancy agreement.The chief similarity between traditional dormitoryrevenue bonds and project dormitory bonds is thateven traditional dormitory revenue bonds are technicallynon-recourse obligations. Bondholders are oftenentitled only to pledge revenues derived from theproject or system of projects. So, for both, the revenuestreams are narrowly defined as being producedby a particular project or set of projects. Anothercorollary is that both are occupied by customers—students of the college or university. As such, it isprobably incumbent on the college to ensure that anyproject to which they are related provides studentswith decent, livable, and economical space. If studentsin the privatized facilities also receive financialaid from the institution for living expenses, theschool is indirectly paying for the facility. If the collegeis a residential college, it may not make financialsense to use financial aid for a project in which thecollege builds no ownership equity.Rating methodologyIn assessing this type of debt—without ownership(and usually without management) by the university—Standard& Poor’s examines many of the samecharacteristics that are evaluated for traditionalauxiliary bonds. Generally the following factors arenecessary to achieve an investment-grade rating.While the following section speaks largely to housing,any other enterprise financing could apply thecriteria for relevancy.Evidence of long-term institutional viabilityA school with a long-term GO rating of ‘BBB+’ orhigher and a strong residential mission is likely tohave the capacity to consider this new type offinancing option. Below this rating threshold,achieving an investment-grade project-based ratingmight be difficult, unless the school provides directfinancial support.Relationship between project owner and relatedinstitutionThe relationship between the two will be evaluatedbased on board composition, ground lease structure,management agreement, and the factors leadingto the decision to pursue the particularfinancing. A university that will ultimately ownhousing in the middle of its campus seems to have avested interest in making that project successful.However, the degree to which a university, particularlya public university that does not currentlyown a project, can legally, or is willing, to cover ashortfall in debt service for that project is untested.It may be easier for private universities to step upto a financially unsuccessful project, but only if it ison their campus and they already exercise somecontrol and oversight.Project demandStudent demand for a new housing facility might bedemonstrated by demand for existing on-campushousing. High occupancy rates, replacement housing,the presence of waiting lists, university leasing of offcampushousing accommodations, and recent enrollmentgrowth will all be viewed favorably. Standard &Poor’s will evaluate external feasibility studies thatshow sufficient demand for on-campus housing, butthese usually provide only partial comfort.Project locationMost projects rated in this way will be on or nearthe core college or university campus. If the proposedhousing is off-campus, the college does notthe land, and there is no significant financial ormanagerial link to the school, Standard & Poor’swould most likely use its affordable housing criteriato rate the project debt.Project managementThe highest rated projects will often by managed byan institution itself (which connotes a higher degreeof responsibility and oversight). At the behest of theuniversity, other projects will be handled by outsidemanagers, usually a for-profit company. The lengthof management contract is generally not as importantas other credit factors. A stronger institutionallink will include university rate setting, budget setting,and housing policies that are virtually indistinguishablefrom other university housing.Rate covenantRate covenants will typically cover debt service andoperating expenses. A typical rate covenant will setrates at a minimum level of 1.20x the next year’sdebt service and operating expenses. In Standard &Poor’s experience, many standalone privatizedhousing projects, that have been completed, haveexperienced either pricing pressure or higher thanexpected costs, such that it has been difficult tomeet the standard 1.2x rate covenant.Additional bonds testsAdditional bonds tests should protect bondholdersagainst the possibility of future debt weakening ordiluting the specific project’s revenue base.www.standardandpoors.com187