UNIVERSITY HAS $904 MILLION OF OUTSTANDING RATED DEBT, INCLUDING COMMERCIAL PAPER PROGRAM AT FULL $300 MILLION AUTHORIZED AMOUNT
Illinois Finance Authority
NEW YORK, Feb 15, 2011 -- Moody's Investors Service has affirmed Northwestern University's
(Northwestern's) Aaa, Aaa/VMIG1 and P-1 outstanding ratings in conjunction with
the remarketing of its Series 2004-A, 2004-B, 2008-A, 2008-B and 2008-C
Adjustable Rate Revenue Bonds with $260.8 million outstanding on March 1, 2011
(see RATED DEBT) and the expansion of its Series 2005 Commercial Paper program
to $300 million from $200 million. The rating outlook is stable. The tender
features of the university's variable rate bonds and commercial paper are
supported by the self-liquidity of the University(see SHORT-TERM RATIONALE).
RATINGS RATIONALE: Northwestern's Aaa rating reflects its excellent financial
resource cushion for debt and operations, strong national student market, high
research activity, healthy gift revenues, and consistently favorable operating
performance and cash flow. Offsetting challenges are strong competition for high
quality students and research funding, a debt structure with bullet maturities
and substantial unfunded investment commitments. The VMIG1 and P-1 ratings
reflect sufficient self-liquidity of the university to support the tender
features of its variable rate debt and repayment of maturing commercial paper.
LEGAL SECURITY: Northwestern's outstanding bonds and commercial paper are on
parity and are unsecured general obligations of the university. Currently
Northwestern intends to remarket the Series 2008-A and 2008-C bonds will have a
reset date of 3/1/2012, the Series 2008-B bonds for 3/1/2013 and the Series
2004-A and 2004-B for a reset date of 3/3/2014.
INTEREST RATE DERIVATIVES: The university is a party to six interest rate swap
agreements with three counterparties on a total notional of $262 million -
JPMorgan Chase with total notional of $88 million, Bank of America with $87
million total notional and Morgan Stanley with $87 million total notional.
The swap agreements hedge the Series 2004 and Series 2008 Adjustable
Rate Revenue Bonds. In all swap agreements, Northwestern receives SIFMA and pays
from 4.20% to 4.38%. The swaps hedging the Series 2008 bonds are co-terminus
with the underlying debt. During January 2011, Northwestern adjusted the
termination dates for the swaps related to the Series 2004 bonds to 2014. The
university is required to post collateral for only one of the swaps based on a
threshold and has not been required to do so. As of February 7, 2011, the swaps
have a market value of $26.5 million liability to Northwestern. At its current
rating level and levels of unrestricted resources, we believe the liquidity
and termination risks are incorporated into Northwestern University's
*Excellent financial resource cushion, with expendable financial resources of
$5.1 billion for fiscal year (FY) 2010 cushioning $924 million of total proforma
debt (assuming full $300 million commercial paper program with the increase in
the authorized commercial paper program) by 5.5 times and annual operations by
3.0 times. Total financial resources increased to $6.1 billion at the end of FY
2010 from $5.9 billion in FY 2009, driven by investment gains and retained
operating surpluses. Unrestricted resources of $3.4 billion are up from
$3.0 billion the prior year and represent 55% of total financial
resources, providing good resource flexibility to the university.
*Strong academic reputation and nationally ranked programs contributing to solid
student demand statistics, high net tuition per student, and growing enrollment.
In fall 2010, Northwestern enrolled 15,892 full-time equivalent (FTE) students,
an increase of more than 9% since Fall 2006. Selectivity and yield are good and
continue to strengthen, with freshman acceptances of 23% and yield of 33% for
the Fall 2010 freshman class, compared to 27% and 31%, respectively, for the
prior year. The university's large graduate and professional enrollment, nearly
half of FTE enrollment, contributes to the university's high net tuition
revenue. For FY 2010, net tuition per student was $31,464, up 13% since FY 2006
and among the highest levels for comparably rated institutions.
*Good research growth with total federal research awards of $452 million,
compared to $343 million the prior year including $73 million of federal ARRA
stimulus funds. In 2010, 57% of federal funding was derived from the Department
of Health and Human Services, with 9% from National Science Foundation and 6%
from the Department of Defense. The university will face heightened competition
for research funding that is likely to receive modest increases if not funding
reductions with the federal budget pressures. However, we believe that through
proactive management of its research program, the University will be able adjust
to changing federal research priorities.
*Consistently favorable operating performance and strong debt service coverage,
with a three-year average operating margin of 6.7% as calculated by Moody's
assuming a 5% endowment spend rate. Operating cash flow is also strong, with a
15.8% margin in FY 2010, providing excellent average debt service coverage
of 6.8 times, although we note that Northwestern has a significant number of
bullet maturities for its debt which understates debt service relative to
comparably rated institutions. The university benefits from diverse revenue
streams, with approximately 31% of FY 2010 operating revenue generated from
student charges, 26% from grants and contracts, 10% from gifts, and 18% from
*Continued excellent fundraising, with three-year average gift revenues of $205
million for FY 2010. Northwestern currently is not conducting a comprehensive
fundraising campaign, but is running smaller ones for specific colleges or
programs to finance planned capital projects. Total gift revenue for FY 2010 of
$208 million is up modestly higher than the $194 million the previous year
driven by unrestricted gifts.
*No current debt plans for the next year and moderate balance sheet leverage,
with total direct debt of $924 million assuming full issuance of the
university's $300 million taxable commercial paper program. Northwestern is
reviewing its capital plans to determine project priorities, funding sources and
a timeline for future debt issuance.
*Fierce competition for most talented students with an array of public and
private institutions as Northwestern's student quality continues to rise and its
national recruiting grows. Northwestern competes nationally against other highly
ranked private and public universities. Private higher education competitors
include Washington University (Aaa), University of Chicago (Aa1), John Hopkins
University (Aa2) and Duke University (Aa1), as well as most of the Ivy League
institutions. For public higher education institutions, the University's
applicants overlap with University of Michigan (Aaa) and University of Illinois
(Aa2) among other public universities.
*Strong competition for federal research funding, particularly NIH grants, in
light of uncertain federal funding levels. This could limit research growth at
prior levels, particularly as other research intensive universities and research
organizations have generally invested in their facilities and recruited primary
investigators with teams to build their own research activities.
*Substantial unfunded investment commitments amounting to $1.27 billion at FYE
2010. The university intends to fund capital calls from capital distributions
from existing investments, new gifts received and liquidation of investments.
*Debt structure, which includes bullet maturities, necessitating careful
internal management of debt. Further, currently all of Northwestern's variable
rate bonds reset on 3/1/2011, which in the event of a failed remarketing could
put strain on the university's liquidity. This is mitigated by Northwestern's
liquidity as well as active debt management and oversight.
For its fiscal year ending August 31, 2010, the university reported an
investment return of 10.8% which compares favorably to an investment loss of
16.9% in FY 2009. Northwestern's investment portfolio is diversified, with
traditional domestic and non-US equities comprising 25% of the portfolio;
16% for absolute return investments (hedge funds); private investments at 23%;
fixed income at 9%; commodities and other alternatives at 17%; real assets at
9%; and cash of 1%. Northwestern employs an in-house group of investment
professionals charged with direct oversight of the portfolio fund managers for
the alternative asset classes and regularly assesses manager or industry
concentrations, as well as manager performance. Liquidity is good, with monthly
liquidity of $1.97 billion at fiscal year-end (FYE) 2010, up from $1.49 billion
for the prior year. Unrestricted cash and investments available within a month
provided 427% coverage of demand debt and 457 days of operating expenses, or 15
months of operations.
SHORT-TERM RATING RATIONALE: AMPLE LIQUIDITY FOR VARIABLE RATE DEMAND DEBT AND
COMMERCIAL PAPER PROGRAM
Moody's believes that Northwestern's self-liquidity program offers adequate
coverage for the tender features of its weekly variable-rate demand bonds and
its commercial paper program following the increase of the authorized issuance
of the program to $300 million from $200 million. Our evaluation of the
university's liquidity incorporates a number of potential calls on the liquidity
of the institution, including its self-liquidity debt, overall debt
structure, endowment spending requirements, private investment capital
calls, and the general operating needs. Currently, the university's entire
variable rate bonds - the Series 2004A, 2004B, 2008A, 2008B and 2008C bonds -
are in adjustable rate term mode and reset on March 1, 2011. Northwestern
currently intends to remarket the bonds for reset dates of March 1, 2012,
2013, and 2014.
The commercial paper program is now authorized for $300 million, although no
more than $50 million of commercial paper can mature on a single date and $250
million in a single week. Currently, the university has $141 million of
outstanding commercial paper, with no more than $50 million maturing on a single
day and staggered maturities through June 2011.
We apply our Modified Approach to Northwestern's self-liquidity analysis, as
detailed in our November 2006 report, "Variable Rate Debt Instruments
Supported By An Issuer's Own Liquidity."
Northwestern University has ample liquid resources to support the
tender features for its total $561 million of variable rate debt and
commercial paper notes (assuming the full $300 million of CP is
outstanding), although we note that $280 million of the bonds are all
resetting on a single date of March 1, 2011. The university currently has over
$574 million of investments with same-day liquidity on a discounted value; these
include funds in money market fund rated Aaa by Moody's, checking and demand
accounts and approximately $261 million in US Treasuries and agencies. Same-day
liquidity provides 1.5 times coverage of the university's short-term demand debt
($250 million of commercial paper that can mature in one week) and 50% of the
bonds in long mode, representing solid coverage.
The stable rating outlook is based on our expectation that Northwestern will
sustain its excellent student demand across its diversified programs, as well as
healthy operating cash flow combined with financial resource and revenue growth
offsetting planned periodic debt issuance.
What Could Change the Rating - UP
What Could Change the Rating - DOWN
Substantial unexpected additional borrowing or prolonged period of
investment declines resulting in a weakened balance sheet profile.
KEY DATA AND RATIOS (Fiscal Year 2010 financial results; Fall 2010 enrollment)
Total Enrollment: 15,892 full-time equivalent students
Total Proforma Direct Debt: $924 million (including Taxable Commercial Paper
Notes at full program size of $300 million)
Unrestricted Financial Resources: $3.4 billion
Expendable Financial Resources: $5.1 billion
Total Financial Resources: $6.1 billion
Monthly Liquidity: $1.97 billion
Monthly Liquidity to Demand Debt: 427%
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 457 days
Expendable Resources to Direct Debt: 5.5 times
Expendable Resources to Operations: 3.0 years
Total Resources per Student: $383,996
Three-Year Average Operating Margin: 6.7%
Operating Cash Flow Margin: 15.8%
Revenue Bonds Series 1993, 2003, 2006: Aaa
Adjustable Medium Term Revenue Bonds Series 1997: Aaa
Adjustable Rate Revenue Bonds, Series 2004A/B, Series 2008A/B/C: Aaa/VMIG1
(based on self-liquidity)
Taxable Commercial Paper Notes, Series 2005A: P-1 (based on self-liquidity)
Northwestern University: Ingrid S. Stafford, Associate Vice President for
Financial Operations & Treasurer, 847-491-7350; Karl Turro, Controller,
Financial Advisor: William Blair & Company, LLC, John H. Peterson,
The principal methodology used in this rating was Moody's Rating Approach for
Private Colleges and Universities published in September 2002.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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Diane F. Viacava
Public Finance Group
Moody's Investors Service
Erin V. Ortiz
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S AFFIRMS NORTHWESTERN UNIVERSITY'S (IL) Aaa, Aaa/VMIG1 AND P-1 OUTSTANDING RATINGS IN CONJUNCTION WITH REMARKETING OF THE SERIES 2004 AND 2008 ADJUSTABLE RATE REVENUE BONDS AND EXPANSION OF COMMERCIAL PAPER PROGRAM; RATING OUTLOOK IS STABLE
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