Haverford College administrators say they were not surprised by a recent downgrade on the College’s long-term bonds from Aa2 to Aa3 by the ratings company Moody’s, a mark down which still qualifies the bonds as high-quality with a very low credit risk.
Vice President of Finance and Treasurer Dick Wynn says the downgrade wasn’t a setback for the college, but rather a delayed reflection of the financial difficulties that the college faced a few years back. He says the College is now back on the path to growth, but continued increases in financial aid spending will need to be met with endowment growth.
A report published by Moody’s online notes that Haverford is still recovering from the “outsized 35% loss” to its endowment in 2009, when the recession hit. The report cited several other factors for the downgrade, including that Haverford has fewer financial resources than Aa2-rated small college peers, “stagnant net tuition revenue,” and a need-blind policy that relies heavily on the endowment. Similar small college Aa2-rated peers include Bowdoin, Hamilton, Vassar, Bryn Mawr, Oberlin, and Claremont Mckenna Colleges.
The report also recognizes Haverford’s strengths—strong student demand, good fundraising and liquidity, as well as a back-up bank facility. There is also a stable outlook that expects more gift revenue and no major debt increases in the near future.
The Board of Managers’ finance committee wasn’t surprised by the downgrade, said Wynn and Associate VP of Finance Mike Casel said at an interview earlier this month.
The College is evaluated by two credit rating agencies, Moody’s and Standard & Poor’s (S&P). While S&P has periodically updated the rating, the most recent conducted in February/March, which maintained Haverford’s AA score, Moody’s has been less consistent.
It last rated Haverford in 2010. In 2007, Haverford was upgraded from Aa3 to Aa2 , and has maintained that rating until this year.
Wynn and Casel say that, had Moody’s been more consistent and evaluated Haverford in 2011, the downgrade may have occurred earlier, taking into account that Haverford issued some debt in 2010 and was facing financial difficulty.
On the other hand, they say that if Moody’s had waited a little longer, there may not have been a downgrade altogether. According to Wynn, the firm came to Haverford in June, with the purpose of preparing an evaluation for July. Given that the fiscal year ends on June 30, Haverford wasn’t prepared with updated information from 2013 and Moody’s based their recent downgrade on data available up until FY 2012.
Because 2013 was a good year, Wynn suggests that things may have turned out differently.
The institution raised roughly $23 million in gifts during the 2012-2013 year, down slightly from the $24.9 million it raised last fiscal year. The endowment as of May 31 was worth $433 million, up from $387.5 million the previous year, according to figures provided by senior staff.
While the Moody’s report cited the need-blind financial aid policy as a specific reason for the downgrade, Wynn says it won’t impact any ongoing discussions about the viability of the College’s financial aid policy.
Wynn offers an explanation as to why net revenue from students has been almost flat for four years: Between 2008 and 2012, the College phased in a no-loan policy which expands its financial aid, unlike a more conservative approach that other small colleges are choosing.
He cites the example of Wesleyan University, which said it would drop its need-blind policy last year. Similar colleges with more limited financial aid policies include Bryn Mawr, Smith, and Carleton Colleges. This kind of “need-sensitive” approach draws a favorable reaction from the rating agencies because financial entities seek to increase net revenue from students, Wynn said.
Before the no-loan policy was in place, students receiving aid were expected to contribute between $2500 to $4000 each year through a summer job or loans. By the end of college, students would have borrowed about $14,500, according to Wynn.
However, starting with the class of 2012, Haverford replaced these loans with grants and a tuition discount, meaning each incoming class has brought in less tuition revenue than they would have had the loan policy still been in place. Wynn expects the net tuition to grow again this year because the no-loan policy has been totally phased in.
Read the full report online: https://www.moodys.com/research/Moodys-downgrades-Haverford-College-PA-to-Aa3-and-Aa3VMIG-1–PR_280602