Stable or positive trends were found in nearly all key 2006 indicators, including student demand, financial reserves, debt and capital spending, and operational performance. Strong support for annual debt service requirements is evidenced by the following trends:

• Modest enrollment growth
• Continued increases in net tuition revenue
• Growing financial resources
• Robust operating cash flow

Capital spending remains high, however growth in debt levels continues to be offset by growth in reserves and revenues. For more than 40 percent of the institutions, debt levels were more than double annual depreciation.

Moody's rates private colleges and universities with more than $50 billion of debt outstanding on an underlying basis. The sector's average rating is A3. When weighted by the amount of rated debt outstanding, the average rose to Aa3.

Capital investment remains strong throughout private higher education. Median spending was 1.7 times the level of annual depreciation; a relatively constant figure over the past three years. Median debt levels burgeoned to more than $69 million in 2006, up from $51 million five years ago. For the sector, total direct debt increased 37 percent.

The median exposure to variable rate debt hit 26 percent. This figure is based on the underlying debt instrument and does not reflect any hedging activity from swaps. Rating category and financial strength were found to be correlated with variable rate debt exposure. Aaa institutions had a median 42 percent of variable rate debt whereas Baa institutions had 8 percent. Of the private institutions rated by Moody's, other highlights include:

• Approximately three-quarters had double-digit operating cash flow margins.
• One third had less than half a year of unrestricted reserves.
• The wealthiest 10 percent of the institutions obtained 60percent of industry gifts for which they applied.

Student demand:

Pricing flexibility continued, indicative of growing demand: Net tuition revenue per student increased a median 5.7 percent, now at $16,478. With a median 0.8 percent increase in enrollment over the prior year, enrollment stayed steady at a median 2,797 full-time equivalent students.

Financial reserves:

Return on financial resources continued to increase, with a median of 10.4 percent. Approximately three-quarters had double-digit operating cash flow margins. Total financial reserves expanded to a median level of almost $185 million. One third had less than half a year of unrestricted reserves. Over the past five years, the total level of financial resources increased by 47 percent. The wealthiest 10 percent of the institutions obtained 60 percent of industry gifts for which they applied.

The largest and wealthiest institutions outperformed in fundraising and investment returns. Aaa-rated institutions had a 13 percent return on financial resources compared to a median 10.4 percent for the whole sector. The wealthiest 20 percent of institutions received almost 75 percent of total giving for the sector, the median three-year average gift revenue. Following a four-year decline, the median three-year average gift revenue rebounded to $11.3 million in 2006.

Financial flexibility grew: Over the past three years, growth in expenses was surpassed by growth in financial resources. The median for coverage of annual operating expenses from unrestricted reserves was nearly 90 percent.

Operating performance:

Dependence on tuition and fees for operating support continued. Revenues from tuition and auxiliary enterprises were a median 74 percent of the operating budget. Baa-rated institutions were the most dependent at 84 percent.

A sector-wide 3.6 percent operating margin was found, due in part to a 7 percent median change in total tuition revenue (reflecting enrollment growth and increases in charges on a per student basis). The median operating cash flow margin (which adjusts for non-cash depreciation expense) also stayed healthy at 12.7 percent. The median was approximately the same in each rating category.

Medians in the report, Private College and University Medians 2007, are based on Moody's analysis of FY 2006 financial and fall 2006 enrollment data for 272 rated private institutions, or over 95 percent of their private higher education portfolio.

1. Excluding ratings based on external third-party support, such as municipal bond insurance or bank letters of credit.

Additional resources are available at:
NACUBO Resource Page on Credit Ratings

Staff resource: Anna Marie Cirino, associate director, financial management policy