UNIVERSITY HAS A TOTAL OF $130 MILLION OF PRO FORMA RATED DEBT
Lexington Industrial Development Auth, VA
Educational Facilities Revenue Bonds (Washington & Lee University), Series 2010
Expected Sale Date
Private University Revenue
NEW YORK, Sep 24, 2010 -- Moody's Investors Service has assigned a Aa2/VMIG 1 ratings to Washington and
Lee University's $15 million Series 2010 Educational Facilities Revenue Bonds to
be issued through the Industrial Development Authority of the City of Lexington
Virginia. The VMIG 1 rating is based on the University's self liquidity. At this
time we have also affirmed our existing Aa2 long-term ratings on the
University's Series 1994, 1998, and 2001 Bonds issued by the Virginia College
Building Authority. The rating outlook is stable.
USE OF PROCEEDS: Proceeds will fund various capital improvement projects and to
pay for costs of issuance.
LEGAL SECURITY: Unsecured general obligation of the University.
DEBT-RELATED INTEREST RATE DERIVATIVES: The University has two interest rate
swaps in association with the 1997 and 2003 variable note issues. The 1997 Swap
is with Wells Fargo (rated Aa2) and expires in December of 2012 and the 2003
swap is with SunTrust (rated A2 on watch for possible downgrade) and expires in
April of 2018. The swaps have a currently combined notional amount of just under
$4 million. As of June 30, 2010 the market value of the two agreements was a
liability to the University of approximately $255,000.
*Robust student market position with undergraduate (liberal arts, science and
business) and graduate (law) programs totaling 2,153 FTE students in fall 2009
demonstrated by a high degree of selectivity (19% of freshmen applicants
accepted in the Fall of 2010) with a 38% yield. This market strength has
translated to solid tuition revenue growth, with net tuition per student at
$25,345 in FY 2009 up from $18,633 in FY 2005.
*Large base of financial resources of just over $1 billion including funds held
in trust by others, or $465,000 per student. Expendable financial resources of
$372 million at FY 2009 cushion pro forma debt by 2.8 times and operations
by 2.9 times.
*Excellent track record in donor and alumni support with average total gift
revenue of $91 million per year in fiscals years 2007 through 2009.
* Healthy trend of positive operations resulting in a three-year average
operating margin of 4.4%. While FY 2009 operations were somewhat weaker than
prior years given growing financial aid, operations remained healthy with 2.2%
operating margin, 13.9% cash flow margin yielding debt service coverage at 1.9
times. Diverse revenue mix comprised of 53% tuition and auxiliaries, 30%
investment income and 16% gifts.
* Concentration of 78% of investments under the full control of one manager
coupled with significant liquidity restrictions. The decision to outsource all
long-term investments to a single manager with sole control over investment
allocation adds concentration risk and, in this case, liquidity risk due to a
lock-up commitment of one year. Aside from a 5% annual distribution to support
endowment spending, University assets held by the manager would not be available
with less than one year notice.
*Given the limited liquidity restrictions of the investment strategy, the
University's liquid resources remain markedly limited relative to peers. At
fiscal year end 2009, monthly liquidity of $50 million represented 153 days cash
on hand, well below our median for Aa-rated private universities of 376 days.
Annual days cash on hand of 406 days, however, is in line with peers with a Aa
median of 404 days.
MARKET POSITION/COMPETITIVE STRATEGY: SELECTIVE STUDENT MARKET
POSITION COMBINING UNDERGRADUATE AND LAW PROGRAMS WITH STRONG TUITION REVENUE
Moody's believes that given Washington and Lee's solid reputation and its
demographically vibrant core markets in the mid-Atlantic and Southeast, the
University will successfully generate greater tuition revenues while maintaining
a stable to slightly growing enrollment and increasing student quality.
Enrollment has remained relatively level with 2,152 full-time equivalent
students (fall 2009), 81% of whom are undergraduates. Freshman selectivity
has improved to 19% for the fall of 2010, down from 28% five years ago. Yield on
admitted freshmen was38% in the fall 2010, in line with recent years. In the
2008-2009 academic year the University began the Johnson Scholarship Program
which covers costs of attendance and will be awarded to about 10% of each
entering class. Funded by a $100 million gift, the Program has led to a marked
increase in applications and is intended to attract exceptional students. Lead
competitors include University of Virginia (rated Aaa), Wake Forest University
(Aa3), Vanderbilt University (Aa2), University of Richmond (Aa1), University of
North Carolina at Chapel Hill (Aaa), and the College of William and Mary. Net
tuition per student of $25,345 is comparable to other highly selective
Universities and points to a solid market niche and relatively affluent student
The University's School of Law also enjoys a prestigious reputation and solid
student market position with its relatively small size (409 students in the fall
2010) and emphasis on faculty-student interaction. In the fall of 2010 the
School of Law accepted 22% of its applicants and yielded 15% of admitted
students. The yield reflects a high degree of competition for the professional
OPERATING PERFORMANCE: STRONG CASH FLOW MARGINS SUPPORT HEALTHY DEBT SERVICE
Moody's calculation of Washington and Lee's operating performance for the
three-year period ending with fiscal year 2009 is 4.4%, with a slight decline to
2.2% in FY 2009. In that same year the operating cash flow margin of 13.9%
supported debt service coverage of 1.9 times and maximum annual debt
service coverage of 1.7 times. Sound budgeting practices should continue to
produce similar results as management reports in preliminary results for FY
The College's operating revenue base was $131 million in 2009, and is reasonably
diversified among student charges (53%), investment income (30%), and gifts
(16%), with the contribution from student charges up from 43% in 2002. The
University's endowment spending policy is the lesser of the prior-year endowment
spending increases by an inflation factor, 6% of the three-year trailing
average, or 5% of the fiscal year end value.
BALANCE SHEET POSITION: OVER $1 BILLION OF TOTAL FINANCIAL RESOURCES PROVIDING A
SUBSTANTIAL CUSHION, BUT LIQUIDITY REMAINS LIMITED FROM INVESTMENT STRATEGY
Washington & Lee gains substantial credit strength from its large base of
financial resources of just over $1 billion including funds held in trust by
others of $272 million at June 30, 2009, the largest of which is the Letitia
Pate Evans Foundation. Expendable financial resources of $372 million at FY 2009
cushion pro forma debt by 2.8 times and operations by 2.9 times. With pro forma
debt of $134 million and maximum annual debt service of 8.4% of operations
operating leverage remains manageable. The pro forma debt is 86% fixed rate with
$15 million of demand debt (the Series 2010 self liquidity bonds) and combined
with several smaller variable rate notes. The University currently has no
future borrowing plans and expects near term capital needs to be met
through donor support and regular capital spending from operations.
We expect Washington & Lee will continue to garner substantial
philanthropic support. The University, over the past three years, has generated
substantial gift revenues averaging $91 million annually; double the three-year
average 2008 Aa-rated median of $43 million. A productive development enterprise
has obtained three specifically large gifts of $100 million, $33 million and $17
million, recognized over the three year period. The University is a in
seven-year campaign with a $450 million and has raised $279 million to date,
with $146 million already received in cash.
In 2007, Washington & Lee made the decision to allocate
significant investment funds to Makena Capital L.P. Makena operates a single
portfolio under which the University does not control asset
allocation decisions. The University currently invests 78% of its
total endowment portfolio with Makena with the intention to move toward
approximately 97% invested in the coming years as other positions are
liquidated. Moody's has reviewed the total asset allocation of Makena which
consists of a diverse asset mix utilizing 150 underlying managers.
Makena investment returns for the 2009 fiscal year and the first quarter of
the 2010 fiscal year are similar to those of comparable peer endowments. The
Makena Capital funds had a 14.8% return in FY 2010, with the total portfolio
including the legacy assets returning 14.3% for the year. In FY 2009 the pooled
fund had an 18.6% loss.
The decision to outsource all long-term investments to an outsourced manager
with sole control over investment allocation adds concentration risk and, in
this case, liquidity risk due to a lock-up commitment of one year. Aside from a
5% annual distribution to support endowment spending, University assets held by
Makena will not be available with less than one year notice.
Currently, operating and quasi-endowment cash and cash equivalents held by the
University are adequate at the current rating level, equaling over five months
of operating expenses. There is elevated potential for future rating pressure
related to the University's investment strategy. This potential arises from high
exposure to operating risks of a single manager, the possibility of unexpected
declines in operating and quasi endowment liquidity and the possibility of
future University decisions to incorporate more risk into their conservative
Given the limited liquidity restrictions of the investment strategy, the
University's liquid resources remain markedly limited relative to peers. At June
30, 2009, monthly liquidity of $50 million represented 153 days cash on hand,
well below our median for Aa-rated private universities of 376 days. Annual
days cash on hand of 406 days, however, is in line with peers with a Aa median
of 404 days. Monthly liquidity cushions pro forma demand debt by 333%.
SHORT TERM RATING RATIONALE: NEW SELF LIQUIDITY PROGRAM
Moody's believes that University's self-liquidity program offers adequate
coverage for the tender features of its $15 million in term rate bonds. The
obligation to make payments on tendered bonds that are not remarketed is a
general obligation of the University. Moody's applies the Standard Approach to
our self-liquidity assessment of Washington & Lee, and we believe that the
self-liquidity program currently provides adequate coverage for the tender
features of the new variable-rate demand bond in the weekly tender mode. Moody's
expects the College will maintain coverage from discounted same day assets in
excess of its self liquidity debt. At August 24, 2010, the College held a
discounted $24 million in investments with same-day liquidity, including $16
million in US Treasury securities held in its own name and $8 million in
deposit accounts with BB&T. The discounted funds provided 1.6 times coverage
of the self liquidity debt. Additionally, the University has approximately $50
million in a commingled short-term investment funds to supports its liquidity
Washington & Lee's treasury management team has developed a series of
procedures to guide its responsibilities under the self liquidity program. The
procedures include a commitment to transfer to the trustee an amount adequate to
cover any tendered bonds not successfully remarketed on the day prior to a
purchase date, offsetting concerns around the relatively limited number of hours
between notification of that amount on the purchase date and the obligation to
wire funds to the trustee by 2:00 pm.
Moody's expects that, despite near term revenue stress, Washington and Lee will
continue to enjoy a robust market position, generate healthy cash flow margins,
and maintain strong financial resource coverage of debt and operations. Moody's
also expects that the University will at least maintain current levels of liquid
relative to cushion outstanding debt and operations.
What could change the rating-UP
Further growth in student demand statistics, significant growth of financial
resources to support debt and operations; increased liquidity of resources
What could change the rating-DOWN
Reduction in monthly liquidity below recent levels, introduction of additional
demand debt or other potential demands on liquidity, extended revenue pressure
resulting in a trend of weakened operating margins
KEY INDICATORS (FY 2009 financial data and fall 2009 enrollment data)
Total Full-Time Equivalent Students (FTE): 2,152 students
Freshman acceptance rate: 19%
Freshman matriculation rate: 49%
Total pro forma direct debt: $134 million
Expendable financial resources: $371 million
Expendable financial resources to pro forma direct debt: 2.8 times
Expendable Resources to Operations: 2.9 times
Monthly Unrestricted Liquidity: $50 million
Monthly Days Cash (unrestricted funds available within 1 month divided by
operating expenses excluding depreciation, divided by 365 days): 153 days
Monthly liquidity to pro forma demand debt: 333%
Three-year Average Operating Margin: 4.4%
Operating Cash Flow Margin: 13.9%
Reliance on Student Charges: 53.4%
Series 1998 Revenue: Aa2: insurance provided by National Public Finance
Guarantee Corp. whose financial strength rating is Baa1 with a developing
Educational Facilities Revenue Bonds Series 2001 & 2006: Aa2
Educational Facilities Revenue Bonds Series 2010: Aa2/VMIG 1
University: Steven G. McAllister, Vice President for Finance and Treasurer,
Financial Advisor: Emily Abrantes, Public Financial Management, 703-741-0175,
The last rating action with respect to Washington and Lee University was on
December 18, 2009 when the Aa2 rating with a stable outlook was affirmed.
The principal methodology used in rating Washington & Lee University was
Moody's Rating Approach for Private Colleges and Universities rating methodology
published in September 2002. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found on Moody's
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings, confidential and
proprietary Moody's Analytics' information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
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.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Dennis M. Gephardt
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Aa2/VMIG 1 RATING TO WASHINGTON AND LEE UNIVERSITY'S $15 MILLION SERIES 2010 REVENUE BONDS AND AFFIRMS EXISTING Aa2 RATINGS; OUTLOOK IS STABLE
Moody's Investors Service
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