To strengthen Union’s case for an A1 rating I conduct a peer comparison to help Union navigate Moody’s new rating methodology.. Executive Summary Why Union’s Rating is Important Union
Estimating a Credit Rating for Union College
Background on Bonds, Municipal Bonds, and Credit Ratings
A bond is a loan from an investor to an issuer, with the issuer promising to pay a fixed stream of interest (the coupon) and to return the principal at a specified maturity date; the maturity is when the initial principal is repaid to the investor The price of a bond is determined by the present value of all future cash flows—the coupon payments plus the principal repayment at maturity One method to determine this price is to discount each cash flow to its present value, as described by the equation in Exhibit 1.
In Exhibit 1, “P” is the price of the bond, “C” is the coupon payment, “i” is the interest rating,
“M” is the principal, and “n” is the “nth” time period
When a state, local government, or other certified issuer issues bonds it is considered a
Municipal bonds differ from corporate bonds primarily in tax treatment: the interest on municipal bonds is generally exempt from federal income tax—and often from state and local taxes as well—while corporate bond interest is taxable This tax advantage lets investors accept lower coupon payments on munis, and it enables issuers to borrow at lower interest rates For example, if two bonds have similar risk and maturity—Bond A is taxable and Bond B is tax-exempt—a 30% tax bracket makes Bond B more attractive whenever its yield exceeds 70% of Bond A’s yield, because the after-tax return on the taxable bond would be 0.70 times Bond A’s yield.
Taxable and tax-exempt bonds explain the relationship between the U.S Treasury yield curve and the Municipal Market Data (MMD) curve, the benchmark yield curve for municipal issues Because municipal bonds are tax-exempt, the MMD curve is typically below the Treasury yield curve by a rate roughly equal to an investor’s tax rate, reflecting the benefit of tax exemption Investors are willing to accept lower interest payments on tax-exempt bonds, which creates the tax-adjusted spread between municipal yields and Treasuries This tax-aware relationship helps explain how the pricing of municipal debt compares with taxable debt and why the MMD curve sits beneath the Treasury curve.
Other certified municipal issuers that are not governments are entities that can claim tax-exempt status, including primary education systems, higher education systems, hospitals, sports arenas, and other not-for-profits that issue tax-exempt debt The U.S tax code, under section 501(c)(3), allows not-for-profits to issue tax-exempt debt (SIFMA 2011).
Municipal bonds are issued to finance either a new project or the refinancing of existing debt When a bond finances a project, such as a state government building a new highway, the issue is described as "new money." If the bonds refinance old debt, the issue is called a "refinancing" (Hoffland 1972) At issuance, the sale occurs in the primary bond market, while after issuance, investors can trade bonds in the secondary bond market (SIFMA 2011).
Bond issuance can proceed through two main sale methods: competitive sale and negotiated sale In a competitive sale, investors submit sealed bids to the issuer, establishing the price through open competition In a negotiated sale, a senior or lead banker is selected to buy the entire bond issue from the issuer at a price that allows the bank to market and resell the bonds on the market A negotiated sale offers greater debt-structuring flexibility and access to banking professionals who can bring new financing ideas for the project, as noted by SIFMA (2011).
Competitive bond sales are less common than negotiated ones, according to Bond Buyer (2016) Yet the process is typically simpler: the issuer announces the offering—usually through Bond Buyer—and a bidding window opens during which investors submit bids on the debt issue The issuer then selects the bid or bids that yield the lowest cost of capital, as noted by SIFMA (2011).
When municipal or corporate issuers decide to come to the market and issue debt, they may choose to pay for credit ratings from rating agencies These ratings serve as endorsements for debt when the rating is favorable and warn investors when the rating falls below investment grade By providing independent assessments of credit risk, rating agencies help close the information asymmetry between sellers and buyers, making it easier for investors to evaluate debt and for issuers to tap capital markets.
2016) The primary agencies are Moody’s, Standard and Poor’s, and Fitch Each agency assigns ratings on somewhat different scales given in Exhibit 2
Exhibit 2: Credit Rating Scales from Moody’s, S&P, and Fitch
Credit ratings, with AAA/Aaa at the top signifying the safest issuers and D or C at the bottom signaling default risk, summarize the likelihood of default and influence yield structures, as higher-rated bonds typically offer lower coupons to reflect lower risk while more risky issuances require higher compensation for investors Hite and Warga (1997) showed that issuers downgraded in the 12 months following a downgrade had to pay substantially higher interest rates than in the 12 months prior, and Hand, Holthausen, and Leftwich (1992) reported similar findings from Moody’s and S&P downgrade announcements As a result, ratings matter for both investors and issuers: investors use ratings to assess risk and return, while issuers aim to keep the cost of capital as low as possible, making the highest rating desirable to minimize the cost of capital.
Higher Education Borrowing
According to U.S News & World Report, the average college or university endowment in fiscal year 2015 was about $355 million Even with endowments of this scale, many institutions issue debt to finance new building projects Endowments typically consist of hundreds or thousands of restricted funds designated for specific purposes—such as financial aid, particular scholarships, or department-specific programs—which limits access to unrestricted dollars for large construction When unrestricted annual giving or large donor commitments for a project fall short, schools turn to debt financing to complete the work In addition, industry expectations encourage maintaining a sizable endowment as a financial cushion during downturns and as a signal of long-term prestige.
Tax-Exempt Debt Regulations
Colleges and universities, as higher-education institutions, qualify for tax-exempt status under IRS code 501(c)(3) This status allows them to issue tax-exempt debt, helping them obtain a lower cost of capital Nevertheless, issuing tax-exempt debt comes with regulatory requirements and restrictions that govern its use and financing practices.
The Municipal Securities Rulemaking Board (MSRB) sets the rules for issuing tax-exempt debt, with extensive and complex regulations designed to ensure compliance and transparency in municipal finance; because these rules cover negotiated deals in great detail, every negotiated issue requires an independent bond counsel to review the issuer’s legality and compliance, a safeguard documented by EMMA in 2011.
Key regulations govern the issuance of debt financing: the project financed by new debt cannot include a taxable income‑generating entity; for example, a tax‑exempt facility may not include rental space for a taxable business such as a coffee shop Issuers must comply with arbitrage rules, meaning bond proceeds cannot be invested at an interest rate higher than the arbitrage yield There are separate rules for calling tax‑exempt bonds out of the market; tax‑exempt bonds may be called only once prior to the call date period, a process known as Advanced Refunding (MSRB 2016) The MSRB’s Refunding section outlines these requirements to guide tax‑exempt bond financing.
An advance refunding occurs when the issuer sells new bonds and places the proceeds into an escrow account The original bonds are not paid off immediately; instead, they are retired from the escrow either at their scheduled maturity or on a future early redemption date in accordance with the bonds’ call provisions The federal tax code generally allows an issue to be advance refunded only once.
1986 may be advance refunded twice)
These regulations illustrate only a subset of the complex regulatory requirements that issuers of tax-exempt debt must understand and meet These restrictions add costs and potential hindrances to the decision of whether to issue tax-exempt or taxable debt, influencing financing choices and compliance obligations for issuers.
The Higher-Education Bond Market
Education debt represents a sizable share of the municipal debt market Bond Buyer indicates that in 2015 the volume of long-term debt issued to education (covering K‑12 through higher education) was nearly $125 billion, while the total tax-exempt municipal issuances that year were about $398 billion, meaning education debt comprised roughly 31.4% of the municipal market in 2015.
The market for municipal debt in the education sector increased considerably Since
1986, for example, the annual issue of long-term education related debt increased nearly 80.4% (Bond Buyer 2016) The number of annual education related deals increased 144% since 1986 (Bond Buyer 2016)
Education-related debt is gaining a larger share of the municipal debt market as the number of issuances and their sizes have risen substantially, signaling a shift in debt composition toward education finance.
Introduction to New Methodologies
After the 2008 financial crisis, it became evident that rating agencies were partly to blame, revealing issues of moral hazard and transparency in their practices In response, the Securities and Exchange Commission tightened regulation through the Dodd-Frank Wall Street Reform and Consumer Protection Act, which took effect in 2010 and requires rating agencies to publish rating methodologies so investors, bankers, and issuers can understand how ratings are determined Consequently, Moody’s and S&P introduced new rating methodologies for higher education debt, published in November 2015 and January 2016 respectively.
Moody’s Global Higher Education Rating Methodology
On November 23, 2015, Moody’s released a Global Higher Education rating methodology that outlines its approach and criteria for rating higher-education debt issued both in the United States and internationally The document includes a scorecard designed to approximate credit profiles within the sector, though Moody’s reserves the right to weigh other factors not listed (Kedem 2015, p 3) Although the scorecard offers a solid approximation of credit risk for a given issuer and rating, Moody’s may consider additional elements beyond those specified in the methodology The analysis centers on four main segments—Market Profile, Operating Performance, Wealth and Liquidity, and Leverage—with Exhibit 3 describing the subcategories within each segment, the typical weights assigned, and the factors used to evaluate each category.
Exhibit 3: Moody’s Global Higher Education Scorecard Factors
Moody’s evaluates each factor criterion for the most recent fiscal year and assigns a score by comparing the factor to predetermined brackets For example, if the annual change in operating revenue is at least 4% but less than 6%, the issuer receives a rating of A for that factor, which corresponds to a score of 6 in this category Each factor earns an individual score, and the overall rating is derived from the weighted average of these scores The lower the overall weighted score, the higher the issuer’s rating.
All factors except one in Exhibit 3 are derived from an issuer’s annual financial statements, so Moody’s rating methodology emphasizes balance sheet and income statement analysis; by contrast, Moody’s earlier higher education rating methodology incorporated non-financial factors about the school, such as matriculation and selectivity, into credit assessments, and consequently, credit ratings under the old methodology reflected these broader considerations alongside financial metrics.
Broad Category & Weight Sub Categories & Weights Factor Criteria
Scope of Operations (15%) Operating revenue Reputation and Pricing Power (5%) Annual change in operating revenue
Strategic Positioning (10%) Broad criteria, including capital and financials plans
Operating Results and Budgetary Flexibility (10%) Operating cash flow margin
Revenue Diversity (15%) Percentage of revenues from its largest revenue stream
We a lt h an d Li q u id it y (2 5 % )
Total cash and investments and Spendable Cash & Investments to Operating expenses Liquidity (5%) Monthly days cash on hand
Leverage is listed at 20%, with financial leverage at 10% and a measure of spendable cash and investments to total debt; debt affordability is 10%, defined as total debt to cash flow In evaluating higher education issuers, the approach mirrors U.S News and World Report rankings, which emphasize selectivity, retention rates, and median incoming SAT and ACT scores as proxies for educational quality Moody’s new methodology treats higher education issuers more like businesses, and even the single non-financial factor, strategic positioning, ties to the issuer’s plans to strengthen its future financial position and the effectiveness of its strategies.
S&P Rating Methodology: Not-for-profit public and private Colleges and Universities
S&P established new methodologies for higher education issuers, with separate frameworks for each issuer type, effective January 6, 2016 The rating approach follows a Moody’s-inspired concept but uses two components—Enterprise Profile and Financial Profile—that are weighted equally, unlike methods with four sections Exhibit 4 describes the Not-For-Profit Public and Private College and University rating methodology.
Exhibit 4: Not-For-Profit Public and Private College and University rating methodology
Unlike Moody’s Global Higher Education methodology, S&P’s methodology described above takes many non-financial factors into account Factors like matriculation and selectivity that
Moody’s has fully removed certain metrics, but S&P continues to measure them The overall risk of the higher education industry is evaluated, and the issuer’s geographic location is assessed using GDP per capita to reflect local economic conditions.
Like Moody’s methodology, each factor is assigned a score that is then weighted to yield an indicative overall score S&P, however, incorporates overriding factors and caps to refine the result The assessment also considers financial trends from the last three years; for example, if operating revenue grows steadily, the issuer may receive a higher rating.
“bump” up on its financial profile S&P also explicitly takes peer analysis into account Other
Broad Category & Weight Sub Categories & Weights Factor Criteria
En te r p r is e P r o fi le (5 0 % )
Industry Risk (10%) Global higher education rated 2 by
S&P Economic Fundamentals (10%) GDP per capita Market Position and Demand (70%)
Selectivity, retention rates, other demand factors, matriculations, FTE (full time enrollment)
Strategic positioning, risk and financial management, organizational effectiveness, and governance
Fi n a n c ia l Pr o fi le (5 0 % )
Transparency, reserve and liquidity, investment management, long-term planning, and debt management policies
Financial Performance (20%) Operating margin, debt service, depreciation, and plant renewal
Financial Resources (35%) Overall leverage and available resources Debt and Contingent Liability Profile
MADS and available resources to total debt
Debt affordability (10%) Total debt to cash flow adjustments are made for things like strong student to faculty ratios, and a high percentage of faculty with PhDs (S&P Global Methodology 2016 p 8)
Comparison of Moody’s and S&P’s Rating Methodologies
Comparing Exhibits 3 and 4 suggests that S&P uses a more holistic approach to its methodology than Moody’s Moody’s indicative score is based roughly 90% on financials, whereas S&P’s indicative score relies about 50% on financials, with ratings routinely adjusted for a broad range of additional factors and trends This is not to say S&P’s approach is superior to Moody’s; rather, the different structures of the rating methodologies will influence issuers’ credit ratings based on where the issuer’s strengths and weaknesses lie.
Because S&P and Moody’s rely on substantially different rating methodologies, issuers should compare the two to determine which approach is more likely to yield a higher rating Studies project that only about 5% of issuers would be affected by Moody’s methodology changes and about 8% by S&P’s changes (Kedem, 2015 p 3; S&P Global Methodology, 2016 p 2) Nevertheless, issuers who have been evaluated by only one agency should consider switching or adding a rating to reap the benefits of the different rating approach and potentially broaden access to capital.
With the deal scheduled in just a few months and an established, favorable relationship with Moody’s, Union College chose to obtain the rating for its next deal exclusively from Moody’s The remainder of the discussion will focus on Moody’s rating approach and its implications for the transaction.
Moody’s Global Higher Education rating Methodology.
Introduction to Union College
Union College, located in Schenectady, New York, is the oldest private liberal arts college in the United States, chartered in 1795 Today the college enrolls roughly 2,200 students and is governed by its president alongside the Board of Trustees, with governance details available at Union.edu.
2017) Union College plans to issue new debt for a new money project during the 2016 - 2017 academic-year The new money project will finance the building of a new Science and
Engineering building (S&E) at Union supports the institution’s strategic goal of maintaining its position as a leading liberal arts college with a strong engineering program The total project cost is $100 million, funded with $10 million from funds on hand, $40 million in pledges, and $10 million from an endowment, leaving $50 million to be financed with new debt Because the remaining portion will be borrowed, the college should be mindful of Moody’s new rating methodology and how it could affect its rating and, in turn, borrowing costs.
Union held an A1 investment-grade rating in 2012 (EMMA 2016) Moody’s notes several strengths, including a 50% rise in financial resources and a 30% increase in cash and investments in FY2014 and FY2015, a low-risk debt structure, and a strong engineering program that differentiates Union from Northeast peer institutions However, Moody’s identifies Union’s reliance on student charges for about 73% of revenues as its principal challenge (Sharma, Gephardt 2012) With no rating activity since 2012 and debt concerns larger than most recent deals, securing the highest possible rating is tied to achieving the lowest possible cost of capital.
Primary Questions
The following questions will guide my thesis with the ultimate goal of making two primary recommendations to Union: how Union should position its credit story to rating agencies, and structures Union should consider when structuring its new debt
1 What is Union’s projected rating using Moody’s new rating methodology?
2 How does Union’s projected rating compare to peer institutions?
3 How should Union position its strengths and areas of concern to rating agencies?
4 What considerations should Union make when structuring the debt?
The above four questions will ultimately lead to recommendations to Union on how to approach its credit rating and the structuring of its $50 million of new debt.
Data Used for Analysis
Regulatory requirements established by EMMA, the Electronic Municipal Market Access system under the Municipal Securities Rulemaking Board (MSRB), mandate that all issuers enter into a Continuing Disclosure Agreement (EMMA 2016) This ensures ongoing disclosure of material information to investors and the market, supporting transparency and market integrity.
Continuing Disclosure Agreement is found in the official offering statements for any issuer post
Implemented in 2012, the regulation obligates debt issuers to publish all available financial data on EMMA, at minimum covering the past five fiscal years to the present Consequently, any college or university that issues debt is required to publicly post its annual financial statements on EMMA’s website.
Financial data are not available in an upload-ready spreadsheet; instead, the statements are PDFs of the final figures This setup makes multi-school peer analysis challenging, as each PDF must be meticulously transcribed into Excel before the key factors from Exhibits 3 and 4 can be calculated for the scorecards.
IPEDS is a public online database that provides financial and nonfinancial data for colleges and universities in the United States The plan was to download the financial data for every not-for-profit four-year institution in the Northeast and compute relevant financial ratios with R, a statistical computing language, to produce medians for key indicators This would enable the comparison of institutions and the generation of benchmark medians for indicators such as operating revenue changes For example, if the median change in operating revenue from FY2014 to FY2015 is 5%, Union’s operating revenue change above that threshold could be identified as a credit strength to rating agencies.
Because the IPEDS dataset cannot reliably support this analysis due to differences in accounting practices across schools, direct comparisons are not feasible Although Union College and Bucknell University share the same independent auditor, KPMG, their financial statements report different line items for leverage calculations, which affects ratios like spendable cash and investments to total debt as required by Moody’s and S&P Union explicitly shows "Pledges receivable, net" on the income statement, necessitating its addition back to the numerator, while Bucknell groups this item under a broader category—"Inventories, prepaid expenses, and other assets—Accounts and other receivables, net"—with the exact figure located only in an appendix Such differences in accounting reporting are common across colleges; for example, Hamilton College combines amortization and depreciation, whereas most peers list them separately Other key line items are reported differently across institutions, underscoring the challenge of achieving apples-to-apples comparisons in higher education financials.
• Total Debt, which is sometimes listed separately and sometimes lumped together with other liabilities
• Funds Held in Trust, which is sometimes listed in the balance sheet and other times listed in an appendix
• Investments, which are sometimes listed as many separate line items that must be added together or sometimes as a single item
Because accounting varies widely among higher education issuers, no single IPEDS variable can reliably map to the line items in all issuers' financial statements, so determining which IPEDS variable corresponds to an issuer's finances requires issuer-by-issuer evaluation and data manipulation The challenge is intensified by IPEDS' gaps: the dataset omits key variables needed to calculate financial ratios used in scorecards For example, IPEDS does not include measures of amortization or cash and cash equivalents, two essential components in many financial ratio calculations As a result, IPEDS data are effectively unusable for conducting peer analysis and deriving financial medians.
To gather the financial data, the most viable approach was downloading each issuer’s financial statements from EMMA and transcribing the figures manually I built a comprehensive spreadsheet for every institution that consolidates its financial data for fiscal years 2014–2016 and the past five fiscal years for Union; the full dataset is available in Appendix A.
To analyze key non-financial performance, I use the Common Data Set Initiative reports for Union and its peer institutions Every participating school reports admissions data and positioning trends, from which I pull standard metrics such as graduation rate, total applications, total admitted, total enrolled, and the percentage of students by program area This raw information is documented in Appendix A.
Methodology for Calculating Preliminary Ratings
My methodology goal was simple: to recreate Moody’s scorecards by aligning them as closely as possible with Moody’s rating methodology to simulate the actual preliminary rating scores The rating methodology provides the essential information needed to reproduce the scorecard.
In section 1.2, Moody’s scorecard assesses ten factors, nine of which rely on financial statements For each factor, Moody’s defines specific scoring ranges, and Exhibit 5 provides an example of these ranges.
Exhibit 5: Ranges for Operating Revenue ($000) According to Moody’s Methodology
For example, if an issuer's operating revenue ($000) is 85,000, the issuer would score an A for this factor Once the financial ratios are calculated, applying the methodology to evaluate how the issuer would score for that given factor becomes straightforward.
We streamlined the process by using an automated scorecard that pulls the calculated ratios and evaluates them against relevant ranges, ensuring consistent, range-based assessment across metrics For example, Exhibit 6 demonstrates the calculation used to assess operating revenue.
Factor Weight Aaa Aa A Baa Ba B Caa Ca
Exhibit 6: Sample Calculation Used to Evaluate Operating Revenue
=IF(C24 >= 2700000, "Aaa", IF( C24 >= 400000, "Aa", IF(C24 >= 75000, "A", IF(C24 >40000, "Baa", IF(C24 >= 30000, "Ba", IF(C24 >= 20000, "B", IF(C24 >= 8000, "Caa", IF(C24 < 8000, "Ca"))))))))
The reference to “C24” is the cell, which pulls the operating revenue ratio Each alphanumerical score corresponds to a numerical value
Exhibit 7: Numerical values to Alphanumerical Scores
If an issuer assigns an alphanumeric value of “A” to operating revenue, which serves as the measure for the Scope of Operations category, the factor score would be 6 The score in each category is then weighted according to the rating methodology, with Exhibit 4 illustrating that operating revenue carries a 15% weight.
Moody’s measures a single nonfinancial factor: strategic positioning, a qualitative assessment of the issuer’s reputation and governance effectiveness This factor is governed by an Appendix A rubric that Moody’s uses to assign an alphanumeric rating Because strategic positioning involves judgment, it can be hard to distinguish between terms like 'strong diversification' and 'highly diversified.' To guide this assessment, I review Moody’s rating reports to see how the agency references a college’s strategic plan or the strength of its governance, and I also incorporate metrics from the Common Data Set.
Aaa Aa A Baa Ba B Caa Ca
1 3 6 9 12 15 18 20 and will be discussed in depth in the section discussing Union’s positioning to credit rating agencies
All the weighted factor scores are summed to produce an aggregate weighted factor score, and a lower aggregate score corresponds to a higher rating Exhibit 8 illustrates Moody’s final scorecard outcome in relation to these aggregated weighted factor scores, showing how the overall score translates into Moody’s rating results.
Therefore, a final aggregate weight score of 4.8 for an issuer corresponds to an A1 rating As noted in Section 1.2, rating agencies reserve the right to adjust ratings for additional credit strengths or weaknesses not captured by the methodology Any differences between the aggregated weighted factor score and the actual rating will be discussed in the findings.
Union College Findings
Based on Union’s FY2016 financial statements and nonfinancial data retrieved from Union’s Common Data Set reports, Union’s preliminary score, with the addition of $50 million of debt is 4.95
An aggregate score of 4.95 corresponds to an A1 rating and sits in the middle of the A1 range of 4.5 to 5.5, signaling the maintenance of Union’s most recent and historical ratings Exhibit 9 shows Union’s scorecard outcome as reported in its FY2016 financial statements.
Exhibit 9: Union’s Moody’s Scorecard According to FY2016 Financial Statements
An extra $50 million in debt directly affects two key factors for Union: financial leverage and strategic positioning Financial leverage, measured as spendable cash and investments to total debt, would fall from 2.6x to 1.8x, reflecting the impact of the added borrowing on liquidity metrics The debt addition could also indirectly influence strategic positioning, since increasing Union’s outstanding debt to $166 million (from $116 million) may be viewed as a weaker strategic move Consequently, achieving a Very Good or better rating in strategic positioning could be pivotal for securing an A1 credit rating, because a weaker strategic score risks pushing Union’s aggregate rating toward an A2.
Exhibit 9 indicates Union scores A or better on all alphanumeric factors except for revenue diversity, which stands out with a Baa rating The key metric for revenue diversity is the maximum single contribution—the share of revenue accounted for by the largest revenue stream Union relies heavily on student tuition and fees, roughly 70% of total revenues To rating agencies, this concentration poses a risk because an event that deters students from enrolling could erode the primary revenue source used to service investors.
Union's strongest categories are reputation and pricing power, operating results, operating reserve, and liquidity The Aaa factor score for reputation and pricing power is high due to Union's substantial annual growth in operating revenue, with operating revenues rising steadily over the last five fiscal years: about 8% from FY2013 to FY2014, roughly 11% from FY2014 to FY2015, and nearly 16% from FY2015 to FY2016 This revenue growth was driven by increases in tuition and fees, room and board, and private gifts and grants, with private gifts and grants showing the most significant expansion—236% since FY2011—largely attributed to a giving campaign led by President Stephen Ainlay The operating results category is also strong, as reflected by an operating cash flow margin of nearly 27%, indicating that Union's management policies and financial plans align with revenue and expenditure growth goals.
Union maintains a strong operating reserve and liquidity profile The operating reserve, defined as spendable cash to operating expenses, stands at 3.6x, indicating Union can operate without needing additional funding Liquidity remains robust, with days cash on hand at 594 days, signaling ample liquidity to meet ongoing needs Moody’s consistently highlights Union’s liquidity as a strength, a view echoed by Sharma and Gephardt.
Union’s preliminary weighted scorecard returns a 4.95 and an initial A1 rating, but that does not guarantee it will retain the prior rating Moody’s notes that almost all final ratings fall within one or two notches of the preliminary scorecard In a negotiated deal like this, the lead banking team often assembles a rating agency presentation for Moody’s, using peer benchmarking to highlight strengths and address weaknesses in order to secure a higher rating Therefore, Union’s presentation of its credit story to Moody’s is central to maintaining an A1 rating, and benchmarking against peer institutions should be a key part of its credit narrative.
Peer Analysis
Identifying a Peer Group
The first step in conducting peer analysis is choosing a peer group In choosing a peer group I considered the following factors:
• Type of School: Not-For-Profit Private 4-year Institution, Co-Ed
• Size: Enrolls fewer than 5,000 students
• Reputation: Ranking above 40 on U.S News and World Report
Location matters because the economic landscape varies widely across the country, making cross-regional comparisons complex; the Northeast is generally wealthier than southern or midwestern regions, so it isn't a suitable basis for benchmarking The type of higher education institution drives Moody’s evaluation, since Moody’s identifies distinct methodologies for universities versus colleges, so to compare Union’s estimated Moody’s score to other schools, the comparison should be limited to not-for-profit private 4-year institutions Size matters for similar reasons and is closely tied to revenue and other financial indicators, given that most schools rely heavily on tuition and fees for income Finally, reputation influences substitutability: institutions with similar reputations are closer substitutes in the college market, sharing a similar demand base and affecting factors such as selectivity, retention, and matriculation.
Using the criteria identified above, Bates College, Hamilton College, Colby College, Franklin and Marshall College (F&M), and Bucknell University are identified as Union College's peer institutions, and Exhibit 10 offers a concise comparison of Union College with these five peers.
Based on these nonfinancial criteria, Bates and F&M are arguably Union’s closest peers.
Union Compared to Peers with Moody’s Methodology
Exhibit 11 summarizes Union’s comparison with its peer institutions using the FY2016 financial statements—the latest data available—and applying the same scorecard methodology used previously The exhibit presents the preliminary outcomes for Union’s peer group, enabling a direct assessment of Union’s standing relative to its peers within the established evaluation framework.
Exhibit 11: Peer School Analysis According to Moody’s Scorecard
School Enrollment Location U.S New & World
Private not-for- profit 4-yr institution
Hamilton and Bucknell, both currently Aa2, received preliminary overall scores in the A1 category—5.0 for Hamilton and 5.1 for Bucknell—two notches below their existing ratings Colby, also Aa2, posted a 4.5, placing it in Aa3, one notch below its current Aa2 rating Bates recorded the lowest overall score in the group at 7.3, which puts it one notch below its current A1 rating, with a preliminary rating of A3 F&M posted a preliminary A1 rating, consistent with its current rating.
Potential Explanations for Inconsistencies
Moody's scorecard analysis of Union College and its liberal arts peers raises the question: are Union, Bates College, and Franklin & Marshall under-rated, or are Hamilton College, Colby College, and Bucknell University over-rated? The current ratings were calculated using Moody’s older higher education methodology, which relied more on student-demand factors like retention and matriculation—measures that Moody’s has since eliminated These are also the metrics used by U.S News & World Report in its rankings, so I looked up the top ten liberal arts colleges in USNWR and found that all of them sit in Moody’s highest investment-grade category, Aaa My suspicion is that Moody’s adjusted Colby and Bates, ranked 12 and 13 respectively, for their strong reputation and high demand, which could explain why their poor revenue diversity is overlooked when demand is high.
Among its peers, Hamilton and Bucknell surfaced with preliminary scores roughly two notches below their current ratings Both schools underperformed in reputation, pricing power, and revenue diversity Since reputation and pricing power hinge on the annual change in operating revenue, the gap may simply reflect limited year-over-year revenue growth for Bucknell and Hamilton; if their operating revenues were already large enough to comfortably cover expenses, the discrepancy is less concerning This scenario is precisely where Moody’s would likely scrutinize annual trends and adjust the ratings to more accurately reflect Hamilton and Bucknell’s financial position.
Credit risk assessments may adjust or weight factors more heavily than those that currently favor Hamilton and Bucknell's scores Moody’s states in their methodology that “in some circumstances, the importance of one factor may exceed its prescribed weight in this methodology” (Kedem, p 5) Potential factors that could be weighted more heavily include strategic positioning, liquidity, and financial leverage.
Moody’s states that almost all preliminary outcomes are within two notches of the final rating, and because these early scores stay within that range, it is reasonable to expect that the preliminary results will closely resemble Moody’s analysts’ final calculations.
Union’s Strengths Relative to Peer Institutions
To compare Union College’s strengths with its Aa2-rated peers—Bucknell, Colby, and Hamilton—it helps to visualize how close Union is to these peers, using Exhibit 12 which plots Moody’s scorecard across ten factors on separate axes In this visualization, larger circles indicate a stronger overall score, while a score of 1 is the best possible result for any factor and 20 is the worst.
Exhibit 12: Union (A1) V Peers Currently Rated (Aa2)
Exhibit 12 shows that the maroon line representing Union’s score largely overlaps with the other lines, indicating similar performance across most criteria, while at certain points Union’s line extends beyond the others, signaling outperformance in specific categories Although the graph does not weigh the factors, it still highlights the close range of the preliminary scores.
Union is on par with or outperforms more highly rated peer institutions across five factors: scope of operations, reputation and pricing power, operating results, operating reserve, and debt affordability In scope of operations, measured by operating revenue, all colleges earn the same A score, with the A band spanning $75,000,000 to $400,000,000 in operating revenues; because that range is broad and tuition bases and student body sizes are similar, every college falls securely into this category Across reputation and pricing power, operating results, operating reserve, and debt affordability, Union shows competitive standing relative to its peers.
Reputation and Pricing Power Strategic Positioning
Union (A1) V Peers Currently Rated (Aa2)
Union currently holds an A1 rating, while Hamilton, Bucknell, and Colby are rated Aa2; Union’s pricing power is among its strongest attributes, as reflected in its annual change in operating revenue The substantial revenue growth driven by increases in private gifts makes Union stand out from peers that experienced only modest revenue growth.
Union College shows strong financial health as reflected in its operating cash flow margin of 26.8%, well ahead of the next-highest peer at 15.8%, driven by solid operating income while peers struggle with low or negative income that requires endowment spending or other funds to cover shortfalls This enables Union to cover annual expenses more easily than its peers The institution’s robust operating reserve factor, defined by spendable cash and investments relative to operating income, signals resilience in times of financial stress Moreover, debt affordability remains solid at 5.0x even with a planned $50 million addition, aided by Union’s comparatively lower debt burden—$116 million outstanding versus Hamilton and Colby surpassing $220 million—making Union a more cautious borrower Taken together, Union’s strengths relative to peers stem from rising operating revenue and relatively low debt outstanding.
2.5 Union’s Areas of Weakness Relative to Peers
Compared with Union, peer colleges achieve higher scores in four core dimensions—liquidity, financial leverage, total wealth, and strategic positioning—reflecting a stronger overall profile for the peers Union’s liquidity is solid at 594 days, placing it in the Aa range for this metric Although peer institutions exhibit even higher liquidity, this difference does not undermine Union’s standing.
Financial leverage, defined as spendable cash and investments relative to total debt, and total wealth, defined by all cash and investments, are tightly linked because both depend on cash and investments, a relationship that is reflected in Union College’s scorecard by its smaller endowment Union’s endowment, valued at $432 million in FY16, is about half the size of peer endowments at Hamilton ($883 million), Bucknell ($817 million), and Colby ($925 million), making endowment size Union’s most significant financial concern There is an industry expectation that colleges draw on the endowment gradually year over year; if Union ever had to use the endowment to cover debt service, a substantial portion could be depleted, which would raise concerns for rating agencies The worry is intensified by Union’s endowment return, approximately −9.0%, cited by Bloomberg as the worst among the “little Ivies” (McDonald, Smith 2016).
2.6 Recommendations for Union’s Credit Story and Positioning Union’s Weaknesses
Union's credit rating hinges on two main issues: explaining revenue diversity as its weakest factor and justifying a "very good" score for strategic positioning To strengthen its credit story, Union can rely on peer comparison to demonstrate relative resilience and diversify revenue streams, and point to Moody’s methodology as formal support for how strategic positioning is assessed By aligning its narrative with peer benchmarks and Moody’s criteria, Union can bridge perceived gaps in revenue diversity and validate its favorable rating position within the rating framework.
Moody’s observes that, within a broad revenue category, diversity—such as programmatic and geographic diversity of the student body—can help cushion risk in tuition revenue Union currently holds a Baa revenue-diversity rating because about 70% of its revenues come from tuition and fees, yet that revenue stream is itself diversified across programs and locations Applying Moody’s logic, Union could argue for reevaluating the “broad revenue category” of student tuition and fees in light of its strong programmatic and geographic diversity This analysis also presents an opportunity to highlight Union’s robust engineering program, which differentiates the university from peer institutions and stands to be further enhanced by the S&E project.
Union's programmatic and geographic diversity strengthens its enrollment and revenue base The most recent common data set shows that 68% of students are from out-of-state and 11% are international, reflecting a broad national and global footprint This diversification helps stabilize Union's revenues amid regional demand fluctuations; if demand dips in the Northeast or within the United States, Union can recruit from across the country and around the world to maintain enrollment and financial resilience.
Coupled with Union’s strong geographic diversity is robust programmatic diversity Union offers more than 40 majors to students with the option to combine majors in an interdepartmental major (union.edu 2017) According to the most current common data set report, 13% of students graduated with degrees in engineering Union offers four different engineering majors, one of the primary distinctions between Union and peer colleges Of the five peers identified, only Bucknell had an engineering program This shows not only that Union sets itself apart programmatically compared to peers, but also explains the need to invest in the building of the new S&E project
Union’s largest program of study is social sciences with 30% of the total degrees conferred However, it should be noted that the weight of this category is overstated because social sciences encompass multiple majors and areas of study Therefore, Union is able to attract students interested in a variety of programs, which further protects its student tuition and fees revenue stream Union should aim to highlight the unique combination it offers as a liberal arts school with a strong engineering program This is the essence of Union’s mission to encourage a
Exhibit 13: Union’s Programmatic and Geographic Diversity
Despite earning a Baa rating in this factor, the institution remains the top performer among its peers (see Exhibit 9) Consequently, this category is a common challenge for colleges, as alternative revenue streams tend to be highly incremental and offer only marginal gains.
Through successful strategic planning, however, Union improved in this category over the years Union decreased student tuition and fees as a percentage of total revenue from roughly
Union's Programmatic Diversity by Area of Study
Gender Studies Computer and Information Sciences
The percentage dropped from 82% in FY13 to 70% in FY16, a decline largely driven by rising private gifts and grants since FY11 Exhibit 11 documents this trend, showing the growth of private gifts and grants from FY11 through FY16 in thousands of dollars.
Exhibit 11: Union’s Private Gifts and Grants FY11 to FY16 ($000)
Union's private gifts and grants surged 236% since FY2011, rising from 9% to 22% of total revenue as the university pursued a deliberate revenue-diversification strategy This growth reflects President Ainlay's leadership in identifying diversification as a priority and implementing targeted fundraising initiatives to grow a new revenue stream The plan emphasizes grassroots donor campaigns—such as "A Day 4 U"—along with social-media challenges and Generation U initiatives that engage alumni from the past decade to increase giving.
Recommendations for Union’s Credit Story and Positioning Union’s Areas of Growth 30
Union faces two primary questions in its credit rating: explaining revenue diversity as its weakest factor and justifying a "very good" rating for its strategic positioning To strengthen its credit story, Union should leverage peer comparison to illustrate how it stacks up against sector peers and identify relative strengths and gaps It can also point to Moody's methodology as a respected framework to support its claims about strategic positioning and to underpin the assigned score.
Moody’s framework suggests that even within a broad revenue category, significant diversity can mitigate risk, including programmatic and geographic diversity in the student body tied to tuition charges (Kedem, 2015) Union’s initial alphanumeric score for revenue diversity is Baa, since roughly 70% of revenues come from tuition and fees, yet this revenue line is diverse across programs and campuses Applying Moody’s methodology, Union could argue that the “broad revenue category” of student tuition and fees should be reevaluated in light of its strong programmatic breadth and geographic reach This context also highlights Union’s robust engineering program, which differentiates the institution from peers and stands to be further strengthened by the S&E project.
Programmatic and geographic diversity at Union is strong The latest common data set shows that 68% of students are out of state and 11% are international, highlighting a broad and diverse student body This diversity supports revenue stability by enabling Union to attract learners from across the country and around the world, reducing risk if demand shifts in the Northeast or the United States.
Union combines strong geographic diversity with robust programmatic diversity, offering more than 40 majors and the option to pursue an interdepartmental major The most recent common data set shows that 13% of students graduate with engineering degrees, and Union offers four engineering majors, a key distinction from peer colleges Among the five peers identified, only Bucknell has an engineering program, highlighting Union’s distinctive academic profile and supporting the rationale for investing in the new S&E project.
Union's largest program of study is the social sciences, accounting for 30% of all degrees conferred, though the category's weight is overstated because it spans multiple majors and areas of study By offering a wide range of social science disciplines, Union attracts students with diverse interests, which helps stabilize tuition and fees revenue The university should emphasize its distinctive blend as a liberal arts college with a strong engineering program, highlighting how this combination supports a broad-based, interdisciplinary education This mix lies at the heart of Union’s mission to encourage a balanced, integrative learning experience.
Exhibit 13: Union’s Programmatic and Geographic Diversity
Even with a Baa rating in this factor, the college remains the best among its peers (Exhibit 9), underscoring how this revenue category continues to challenge higher education since alternative revenue streams are typically incremental.
Through successful strategic planning, however, Union improved in this category over the years Union decreased student tuition and fees as a percentage of total revenue from roughly
Union's Programmatic Diversity by Area of Study
Gender Studies Computer and Information Sciences
The percentage declined from 82% in FY13 to 70% in FY16, with the drop largely attributed to rising private gifts and grants since FY11 Exhibit 11 documents the growth of private gifts and grants from FY11 to FY16, shown in thousands of dollars.
Exhibit 11: Union’s Private Gifts and Grants FY11 to FY16 ($000)
Union’s private gifts and grants rose 236% from FY11 to today, while private gifts and grants as a share of total revenue climbed from 9% to 22% over the same period The uptick reflects a deliberate shift toward revenue diversification and systematic growth in alternative income streams Led by President Ainlay, the campus pursued a strategic plan to boost giving through grassroots campaigns like “A Day 4 U,” innovative social media challenges, and fresh approaches to “Generation U”—the alumni of the past decade Together these efforts broaden donor engagement, reduce reliance on traditional funding, and strengthen the university’s long-term financial resilience.
2017 shows that the success of these campaigns affirms that growth will be sustained in the future and does not reflect a one-time increase in private gifts and grants Moody’s specifically states that the observed trend signals durable expansion and a solid long-term fundraising trajectory.
“Integral to determining strategic priorities is a university’s ability to identify strengths and weakness relative to key competitors and to track progress against established goals (Kedem
Union's Private Gifts and Grants FY2011 to FY2016 ($000) success in doing so could also contribute to its goal of achieving an outcome of, “very good” for strategic planning
Union should be prepared to discuss its strategic plan in a broader context, including its negative endowment return and the steps planned to generate positive returns While year-over-year endowment performance can be negative, examining longer time horizons may reveal less drastic declines (Blake 2017) The organization can explain how increasing private gifts and grants is gradually expanding Union’s endowment base and unlocking greater potential In conversations with Union’s Vice President of Finance, Diane Blake, it was confirmed that the board intends to modify how it invests the endowment, moving away from a model where board members alone make endowment decisions Union should outline these investment plans with Moody’s to reassure the rating agency that it has the capability to manage the evolving endowment strategy.
Union College continues to attract future students, with positive trends in applications, retention, and graduation that reflect a generally good student experience Since 2011-2012, Union has largely maintained its selectivity and matriculation percentages, and current data place selectivity at 38% and matriculation at 25% Graduation rates have remained high over the same period, ranging from 86% to 93%, while retention rates are on par with its peers, as shown in Exhibit 14 for Union, Bates, F&M, Bucknell, and Hamilton from 2011-2012 to 2015-.
Exhibit 14: Retention Rates Academic Years 2011-2012 to 2015-2016
Although Union’s retention rates fell about four percentage points from 2012-2013 to 2014-
By the 2015–2016 academic year, Union College’s retention rate converged with its peers at roughly 93%, suggesting that students are largely satisfied with choosing Union College Over the period from 2011–2012 to 2015–2016, Union College increased applications by 16.4%, compared with Bates’ 8.8% growth and Hamilton’s -0.66% decline; Franklin & Marshall (F&M) and Bucknell posted even larger gains of 39.9% and 26.5%, respectively Still, Union College’s 16.4% growth demonstrates a strong and growing demand to enroll at Union College.
To strengthen Union’s credit, it should leverage its strengths relative to its peer group while addressing its two weakest points Those strengths, outlined in section 2.4, should be highlighted to Moody’s and woven into Union’s overall credit narrative A peer comparison clarifies Union’s rising revenues, its cautious borrowing, and its ability to navigate challenging times.
11 - 12 Retention Rates Academic Years 2011 -2012 to 2015-2016
By comparing Union's financial pressures with peers such as Bates College, Franklin & Marshall College, Bucknell University, and Hamilton College, the analysis puts budgetary stress into perspective These strengths reinforce Union’s image as a fiscally responsible institution and support the claim that the Science and Engineering Building project is a carefully planned, financially sound endeavor.
To close the discussion, tie the S&E building project to Union's strategic plan by showing how it strengthens our competitive advantage in engineering with liberal arts, enhances interdisciplinary collaboration, and aligns with the broader vision for campus innovation The updated facility can attract more applicants, improve matriculation, and boost alumni engagement, which in turn supports Union’s credit profile and fundraising momentum Framing the building within Union’s strategic positioning helps demonstrate its role as a catalyst for long‑term success, making a compelling case for a “very good” or better score on strategic positioning and contributing to an overall A1 rating.
Union College Debt Structuring Considerations
Identifying a Framework for Debt Structuring
Issuing debt involves weighing many factors and making numerous decisions, with preexisting debt shaping current choices Consider a hypothetical college—Blue College—that carries a debt load to be serviced in the coming years For illustration, Exhibit 15 breaks down the amount Blue College must repay over the next decade, highlighting how existing obligations influence new borrowing and the overall debt strategy.
Exhibit 15: Blue College’s Current Debt Service
Blue College currently has $70 million of debt outstanding To finance a new dorm and raise an additional $30 million of new money debt, the college has several options One approach is to level its debt service payments by issuing $5 million of debt in successive years.
5 to 10 Let’s call this option 1 Alternatively, Blue College could issue a mixture of short-term
Option 3 moves $5 million of Year 10 debt out to years 11–16, extending the debt structure’s time horizon by issuing $5 million across those years We will call this approach option 3 There are pros and costs to each option.
Option 1, which levels the debt so that $10 million must be paid each year, offers the most financially sustainable profile since debt service is roughly constant from year to year This stability makes budgeting predictable and easier However, it concentrates the debt repayment into a short ten-year period, which is the main drawback of Option 1.
Option 2—mixing short-term and long-term debt—offers the most balanced funding approach With a diversified investor base that includes separately managed accounts, insurance companies, individual investors, and hedge funds, different investors are drawn to different aspects of a bond, making spread of debt across the yield curve essential to ensure there will be investor demand to buy the debt (Guibaud, Nosbush, Vayanos 2013).
Option 3, extending the debt, preserves the current debt structure by pushing debt service further into the future This can be advantageous because Blue College has likely budgeted for the existing debt terms, so the budgeting process remains undisturbed However, converting all debt to long-term financing raises interest costs and payments and increases risk, since longer maturities are viewed as more risky It also hinges on the assumption that long-term interest rates will not fall below current levels at the time of the bond issue (Kancuzk, Alfaro 2009) Market conditions must be evaluated to forecast trends in interest rates.
Although the three scenarios are hypothetical, they illustrate a core framework for Union’s debt strategy The essential considerations are ensuring sustainable debt service within financial constraints, avoiding concentration of debt in any year or cluster of years, maintaining a prudent balance between short-term and long-term maturities, and factoring in current market conditions Beyond these four pillars, bond-structuring choices—whether to issue variable-rate or fixed-rate debt, whether bonds are callable or non-callable, and whether to issue series bonds or term bonds—play a critical role Given that rating agencies typically view variable-rate debt as higher risk and Union’s finance team has indicated a preference for fixed-rate financing, the planned structures will be designed around fixed-rate debt.
Union currently carries debt from four bond series—1999, 2006, 2008, and 2012 Exhibit 16 shows the principal due by year through 2037, the last year with outstanding principal, with each color representing a different bond series and notable spikes in 2029, 2031, 2032, and 2037 These spikes are driven by term bonds; all term bonds issued by Union except the 2037 term bond from Series 2009 are subject to mandatory sinking fund redemption, which requires retiring a fixed portion of bonds on a fixed schedule, so the spikes are not a looming issue in reality For example, the Union Series 2006 official statement notes that the 2031 term bond has its first mandatory sinking fund payment of $2.5 million due July 1, 2027 (EMMA 2017), with three additional mandatory payments in 2028, 2029, and 2030 of similarly sized amounts Exhibit 16 also shows Union’s debt service as issued without the mandatory sinking fund schedule.
Exhibit 17 shows Union’s debt service taking the mandatory sinking fund schedules of the bonds into account
Exhibit 16: Union’s Current Debt Service in $000
Exhibit 17: Union’s Current Debt Service in $000 taking the Mandatory Sinking Fund Schedule into Account
Because sinking fund payments are mandatory, the debt service structure to consider is the one shown in Exhibit 17 rather than the structure depicted in Exhibit 1 The goal is to devise a logical approach to add an additional $50 million of debt on top of and around the existing maturities in Exhibit 17, following a path similar to the Blue College example Each debt structure scenario has its pros and cons, so Union should weigh the trade-offs between long-term and short-term debt, the affordability and sustainability of debt service, and the concentration risk of debt in the context of current market conditions.
Following discussions with Union’s finance department, it was confirmed that $10 million is the maximum amount of short-term debt Union can issue In addition, Union’s underwriter advised that there would be no market demand for short-term debt above $10 million.
The decision to place $10 million of short-term debt into potential structures was based on prior analysis rather than arbitrary considerations Issuing $10 million of short-term debt also aligns with Union’s pledge-payment schedule, enabling the debt to be offset by pledges for all short-term principal payments The finance department clarified that all debt would be tax-exempt and fixed-rate Consequently, any potential debt structures should consist of fixed-rate debt issued in denominations of at least $5,000, which is the minimum for a maturity.
3.3 Potential Debt Structures for Union’s $50 Million of Additional Debt
Three distinct debt structures are proposed for Union’s additional $50 million of new money debt To maximize the long-term to short-term debt balance, the maximum $10 million debt structure option is presented, followed by the “staircase” structure option and the term bond option Exhibits 18, 19, and 20 display these three options in that order.
Exhibit 18: Option 1, Level Debt Service
Exhibit 19: Option 2, “Staircase” Debt Service
Options one, two, and three share identical maturities from 2017 through 2029 and each issues the maximum $10 million of short-term debt The differences among the debt-structuring options appear after 2029: in the level option, principal maturities remain roughly the same height as the 2029 principal; in the staircase option, debt grows gradually after 2029 with $28.8 million of new debt issued between 2029 and 2037; and in the term bond option, the description is incomplete in the provided text.
$13.1 million of new debt issued between 2029 and 2037 and a term bond issued thirty years out to 2047 Each option has distinct pros and cons
Option one, the level option, may appear optimal for avoiding debt concentration since all debt could be paid by 2038, and when interest payments are included, the debt service looks relatively level However, in the early years the issuer must pay interest on all outstanding bonds plus the principal due that year, so as years pass the principal portion rises while the number of interest payments declines A truly level debt service for option one would only occur in the extreme and unlikely case of zero percent interest on all new debt maturities This is why option two—the staircase option—is better at preventing debt concentration Under option two the principal increases, yet the debt service (principal plus interest) can be more evenly distributed; the degree of leveling depends on the achieved interest rate and pricing yields If interest rates are higher, interest payments rise and a more pronounced staircase is needed to keep debt service steady More level debt payments are easier to budget for and are thus more fiscally sustainable because roughly the same amount can be set aside year after year.
Union should assess whether debt structure option two delivers the best sustainability given the substantial plan for principal payments Under option two, the debt imposes a heavy burden over the next twenty years, with $28.8 million in principal due between 2029 and 2037, averaging about $5.8 million per year While option two could be relatively expensive, over $20 million of the debt is longer-term, and longer maturities typically drive higher interest costs and yields.
Potential Debt Structures for Union’s $50 Million of Additional Debt
To finance Union’s additional $50 million of new money debt, I propose three distinct debt-structure options aimed at maximizing the long-term to short-term debt balance: a debt-structure option with a maximum of $10 million, the staircase structure option, and the term bond option Exhibits 18, 19, and 20 illustrate these options in that order, showing how each approach impacts cash flow, refinancing risk, and overall cost.
Exhibit 18: Option 1, Level Debt Service
Exhibit 19: Option 2, “Staircase” Debt Service
Options one, two, and three share identical maturities from 2017 through 2029, with each issuing the maximum $10 million of short-term debt After 2029, the debt-structuring options diverge: the level option maintains principal maturities roughly in line with the 2029 level; the staircase option adds $28.8 million of new debt between 2029 and 2037; and the term bond option follows a different post-2029 structure.
$13.1 million of new debt issued between 2029 and 2037 and a term bond issued thirty years out to 2047 Each option has distinct pros and cons
Option one, the level option, may appear optimal for avoiding debt concentration since the debt is scheduled to be paid off by 2038, but when interest payments are included, the debt service is only truly level in an extreme zero-interest scenario; in practice, the early years require paying interest on all outstanding bonds plus the annual principal, so the nominal principal increases over time as some interest payments decline Therefore, option one would only be genuinely level in an unrealistic zero-percent interest environment The staircase option, by contrast, raises principal over time while aiming for a more level debt service overall, with the actual level depending on the achieved interest rate and pricing yields Higher interest rates raise interest payments and may necessitate a more pronounced staircase to keep debt service manageable, whereas lower rates can yield a smoother payment profile More level debt payments are easier to plan for from a budgetary perspective and support fiscal sustainability because roughly the same amount can be set aside each year.
Union should assess whether debt structure option two delivers the best sustainability given the high average principal payments Structure two imposes a heavy debt burden over the next twenty years, with $28.8 million in principal due from 2029 through 2037, averaging about $5.8 million per year However, option two could be relatively expensive, since more than $20 million of the debt is longer term, and longer maturities typically lead to higher interest costs and yields.
Section 3.4 examines two recent college debt issues and current interest-rate conditions to illuminate how costly longer-term borrowing can be This analysis helps readers understand how rate trends affect the affordability of extended-term debt for financing higher education.
Option three combines the “staircase” idea from option two and removes the heavy debt burden from 2029 to 2037 by issuing a long-term term bond due in 2047 As opposed to issuing
Option two totals $28.8 million over 2029–2037, while option three amounts to only $13.3 million in the same period Exhibit 20 shows that option three uses a staircase structure that rises to 2029, followed by a lower staircase from 2029 to 2037, reducing debt service in mid-years while preserving the staircase pattern through the period.
2029 offers greater flexibility for future debt needs, allowing Union to issue additional debt five or ten years from now and to add principal to years after 2030 without exceeding budget constraints Lowering the principal over these periods also reduces average principal payments—from about $5.8 million per year over the next 20 years under option two to about $3.8 million per year over 30 years By extending the farthest maturity to a maximum of 30 years, debt service from a principal perspective becomes more manageable Additionally, issuing a 2047 term bond means Union does not have to account for interest payments on $15.6 million of long-term debt until the bond or sinking fund payments come due Conversely, because term bonds carry additional risk for investors, the interest rate on the bond could be higher.
I recommend making the 2047 term bond subject to mandatory sinking fund payments Union used this tactic in the past to mitigate the spike in principal due in any year, thus avoiding a concentration of debt Sinking fund payments reassure Union the term bond is not a budgetary issue in the future, but the college can steal reap the benefits of not paying the interest on the term bond now
There are infinite ways to structure Union’s additional debt While these three options only represent three structuring scenarios, I think option three, or a structure that uses the same
1 Although there could be a higher interest rate on the 2047 term bond, it will lessen the average debt service over the next 30 years by roughly $2 million in principal annually and have additional benefits in terms of lessened interest payments upfront
2 Breaking the term bond into mandatory sinking fund payments will mitigate the concern of the 2047 principal spike
3 Option three still issues the maximum amount of short-term debt, which assures that Union will take advantage of the lower interest rates on the short end of the yield curve and can offset these principal payments with pledges
4 Option three lowers the debt service between the years 2029 and 2037 by roughly
$15.5 million giving Union increased flexibility for future issues
Therefore, option three achieves the best balance possible between short-term and long- term debt, lowers the concentration of debt by issuing less principal in the mid-term years, makes the debt service more sustainable by lowering the average amount of principal due over the next thirty years, and lowers upcoming interest payments by issuing a large long-term term bond
3.4 Recent College Debt Issues and Interest Rate Considerations
According to EMMA, there were two recent debt issues for higher-education issuers, with the most recent being a three-part deal for Iowa State University of Science and Technology priced March 1 that combined two refundings with a new-money issue, totaling $55.4 million across the three components and bearing a size comparable to Union’s planned issue Each component carried different ratings from multiple agencies and featured a peculiar, tiered interest-rate structure: the first component matures from 2018 to 2042 with rates between 3.0% and 3.5%; the second component matures from 2018 to 2028 at a flat 4.0%; and the third component matures from 2017 to 2034 at 5.0% This level of complexity and the nonuniform rate schedule make the Iowa deal atypical Aside from its size, the Iowa State University issue has little in common with Union’s forthcoming issue.
Haverford College, however, also issued new debt recently Haverford College is a top rated private liberal arts college just outside of Philadelphia On February 28 th Haverford issued
Haverford's debt issuance totaled $98.3 million and carries AA- ratings from Fitch and S&P, equivalent to Moody’s Aa3 and one notch above Union's tentative rating About $40 million of the issue is new money, with the remainder refinancing prior debt; overall the deal is roughly twice Union’s size, but the new-money portion is similar in scale to Union’s Because Haverford is also a small liberal arts college in the Northeast with a credit profile similar to Union, the transaction could offer useful insights for comparable institutions Exhibit 21 shows the maturities, coupons, and yields for Haverford’s Series 2017A issue. -**Support Pollinations.AI:**🌸 **Ad** 🌸 Discover smarter ways to analyze college debt deals with [Pollinations.AI](https://pollinations.ai/redirect/kofi)—perfect for content creators focused on finance and ratings!
Haverford's debt issuance featured serial maturities from 2017 through 2037 alongside three term bonds—one due in 2042 and two in 2046 The offering included only $5.2 million of short-term debt, while three large long-term bonds accounted for roughly half of the total issue This pattern reveals a staircase of issuance, with amounts increasing for maturities further out, signaling a deliberate shift toward longer-term financing.
Yields with an asterisk indicate callable bonds, so maturities from 2027 through 2037 are callable, as are the 2042 issue and one of the 2046 term bonds; among the two 2037 maturities, one is non-callable The non-callable 2042 term bond and the non-callable 2037 serial bond carry lower coupons because investors don’t need compensation for the chance that a bond could be called before maturity Overall, the rate picture is fairly straightforward: the 2017 issue yields 3.0%, the 2018 issue yields 4.0%, and most other maturities sit near 5.0%, with the 2036 maturity offering a lower rate likely to satisfy investor demand for higher yield through longer exposure rather than a larger coupon Theoretical expectations that rates rise gradually with longer terms don’t always hold in practice, but the typical pattern persists in yields: longer maturities generally produce higher yields.