January 4th, 2016
This week we review our proprietary DIVER Geo Score, highlight the best and worst performing States as well as provide you a link to get the scores themselves. We also look at media coverage of a recent higher education bond offering.
December 2015 Geo Scores
Today, we released the most recent DIVER Geo Scores for States, counties and cities. The DIVER Geo Score represents a relative score of the economic health of a U.S. State, county or city. Based on a scale of 0-10, with 10 being the best, this data is updated monthly and is calculated from multiple economic and demographic factors related to three primary data categories—employment, income and housing.
The DIVER Geo Scores are available here.
Texas’ economic statistics are increasingly reflecting the impact of lower energy prices. Texas’ Geo Score is currently the lowest since August ’12.
New Jersey’s economy continues to slide. The State’s declining economy, high debt levels, and underfunded pensions will present tough challenges when/if the State’s absentee Governor returns from the Presidential campaign trail.
Above average improvement in foreclosure rates and employment markets are a common theme for the cities that have shown the most strength over the last year. It is interesting to note that all these cities are in California and Florida.
The geographical mix of worst performers is more varied. Several of the cities share a dependence on Federal government spending: Santa Fe, NM; Las Cruces, NM, Fayetteville, NC; Kennewick, WA; Portsmouth, VA. The recent Federal budget deal which ended the sequester is a positive development for these cities.
Is Amherst College Overrated?
Just before the holidays, Amherst College borrowed $150mm via a taxable bond offering. As an Amherst graduate, I followed the offering with interest. As a market observer, I was intrigued by the extensive coverage given to Moody’s revision to Negative of its Aaa rating for Amherst.
The focus of much of the coverage was the potential for diminished prestige for Amherst if it lost its “Aaa status”. These articles were a welcome distraction from other recent Amherst press coverage regarding whether the new mascot should be Rocky or Bullwinkle or the more serious discussion of implications of sit-ins sparked by the Black Lives Matter movement.
When we look at the premise of the Aaa to Aa1 concern, it seems a little bit silly. The bond rating for an institution like Amherst is a means to end. A higher bond rating can be valuable if it allows an institution to fund its activities more cheaply or if it allows the institution access to capital markets that can lend stability to its financial operations. Neither of these seems to apply in the Amherst case. Tight credit spreads mean that there is very little difference in borrowing cost as a Aa1 vs. as a Aaa credit. Even after the additional borrowing, Amherst has a very strong balance sheet, so access to capital markets is not an issue either.
This Amherst example provides an interesting chance for peer comparison. In many ways, Amherst is nearly indistinguishable from its rival/twin Williams College. Williams is currently rated Aa1 by Moody’s.
A critical credit metric for colleges like Amherst and Williams with large endowments is balance sheet leverage. A common measure of balance sheet leverage for private colleges is Expendable Resources to Debt. A comparison of expendable resources to debt for Amherst and Williams shows very little difference in the years since the financial crisis.
After Amherst’s upgrade in 2001, both Amherst and Williams were rated Aaa. Over the decade, both schools doubled their debt, while asset growth (investment returns and donations) provided a floor to leverage ratios. Williams lost its Aaa status in ’03 when it increased its debt level from $73mm to $172mm. Amherst’s Outlook was moved to Negative in 2009, but retained its Aaa throughout.
While Amherst’s rating advantage pleases my school pride, it is hard to argue that the credit risk of lending to Amherst is a rating notch higher than the risk of lending to Williams.
The large debt increases in by Amherst and Williams during this period were common across much of the private higher education universe. Borrowing for new facilities to compete in the higher education “arms race” has been common. A look at the Moody’s medians for expendable resources to debt by rating category shows that on average, institutions in the sector have not suffered ratings penalties for increasing the leverage of their balance sheets.
As I mentioned before, balance sheet leverage is a key determinant of credit quality for borrowers in the sector. By this measure, Aa rated institutions doubled their leverage during the decade, but suffered no rating penalty.
Have a great week,
Michael Craft, CFA