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Rating Action:

Moody's downgrades Haverford College, PA to Aa3 and Aa3/VMIG 1; outlook stable

Global Credit Research - 20 Aug 2013

$123M rated debt affected

New York, August 20, 2013 -- Moody's has downgraded the ratings on Haverford College's long-term bonds to Aa3 from Aa2 and lowered the ratings on short-term debt to Aa3/VMIG 1 from Aa2/VMIG 1. All of the bonds were issued by the Delaware County Authority. The outlook is stable. The downgrade is driven by a slow recovery in the college's endowment following significant investment losses in FY 2009 and weakened operating performance. The stable outlook anticipates growth in expendable financial resources resulting from favorable investment returns estimated at 14.1% as of June 30, 2013, expectation of increased gift flow, and reduced reliance on endowment draws to support operations.

SUMMARY RATING RATIONALE

Haverford College's Aa3 rating reflects a prominent market position with strong student demand, proven fundraising ability, healthy monthly liquidity to support operations and daily liquidity, which, together with a back-up bank facility, adequately covers demand debt. Offsetting these factors are weak endowment recovery and thin expendable financial resources relative to Aa-rated peers, stagnant net tuition revenue, thinning operating margins, and a needs blind student aid policy requiring greater reliance on endowment spending. The stable outlook reflects expectations for increased gift revenue to strengthen the endowment and provide greater support for operations as well as management of expense growth and the absence of large scale debt or capital plans in the near term.

The Aa3/VMIG 1 on the college's 2008 variable rate demand bonds is based, in large part, on the sufficiency of assets available on a same-day basis when combined with a committed back-up bank facility with TD Bank, NA (Aa3/P-1 stable). The college also has an adequate amount of available funds with weekly liquidity which could be shifted to investments with same-day liquidity should the bank facility not be renewed upon expiration or terminated prior to the expiration date.

CHALLENGES

* The college has been unable to recoup investment losses and rebuild its endowment relative to similarly sized Aa-rated private colleges after facing an outsized 35% loss in FY 2009 and weaker returns in subsequent years relative to peers. The portfolio has been further diminished by higher than average draws on the endowment to provide financial aid and to support operations. Despite having lower financial resources than peers, expendable financial resources provide adequate coverage of debt and operations at 2.04 times and 2.88 times, respectively for an Aa3 credit.

* Operating performance has narrowed to a 13.3% operating cash flow margin in FY 2012 compared to a healthier 20.5% cash flow margin in FY 2010 with expectations of muted performance in FY 2013. Average debt service coverage of 2.76 times is weaker than the 3.40 times FY 2012 median for Moody's Aa-rated small colleges.

* Net tuition revenue has remained relatively stagnate over the past five years due to high and increasing discount rates (39.8% in FY 2012) in part due to the college's need-blind financial aid strategy. Net tuition revenue, the college's largest revenue source, was unable to offset declines in endowment draws, further stressing operating performance.

*Haverford relies on a back-up bank facility to provide adequate liquidity for $29.7 million of variable rate demand bonds. Assets of the college available on a daily basis total only $19 million and TD Bank, NA provides $30 million of additional liquidity.

STRENGTHS

* Haverford maintains its superior market position as a highly selective liberal arts college located in an affluent suburb west of Philadelphia with improving selectivity and stable enrollment. In fall 2012, the freshmen selectivity rate was 22.9% and the matriculation rate was 38.9%.

* Monthly liquidity, at 722 monthly days cash on hand as of FYE 2012, exceeds the FY 2012 median for small Aa-rated private colleges of 501 days providing very strong support for operations. The college could continue to operate for almost two years if revenue were to fall to zero and expenses were to continue unabated.

* The board and alumni have a proven history of strong support for gift campaigns. The college is in the silent phase of a campaign focused on building the endowment to support scholarships. Gifts per student averaged $14,493 in FY 2012, well above Moody's 2012 Aa median for small colleges of $12,308.

* The college has no major debt-funded capital improvement plans in the short- to mid-term, which should enable the college to grow the endowment with anticipated increases in gift revenue and retained earnings.

Outlook

The stable outlook reflects Moody's expectation for increases in gift revenue to rebuild endowment value. An increased endowment will enable the college to provide greater revenue support for operations and offset stagnate tuition revenue and increased expenses.

WHAT COULD CHANGE THE RATING UP

An upgrade is not likely in the near-term given the downgrade. A positive outlook could result from endowment growth that exceeds similarly rated peers over a multi-year time horizon, as well as improved operating performance that reduces reliance on endowment revenue.

WHAT COULD CHANGE THE RATING DOWN

The rating could be lowered if there were a continued material decline in balance sheet strength versus peers, continued weakness in operating performance that requires larger endowment draws, or a weakened market position reflected in significantly weaker student demand.

The principal methodology used in the long term rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. An addtional methodology used in the short term rating was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Heidi Wilde
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Edith F Behr
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Haverford College, PA to Aa3 and Aa3/VMIG 1; outlook stable
No Related Data.

 

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