“Bonds 102”

Introduction to the Bond Rating Process October 16, 2014

• OSU’s debt issued through the State benefited from the State’s general

obligation bond rating. • OSU has not previously requested its own independent rating. • Rating agency opinions help investors gauge the relative risk and therefore

determine the value and interest rate of bonds in the municipal market. • Three major credit rating agencies offer forward-looking opinions about

the ability and willingness of an issuer to meet its financial obligations in full and on time:

o Standard & Poor’s Corporation (“S&P”)

o Moody’s Investors Service (“Moody’s”)

o Fitch Ratings (“Fitch”)

Establishing OSU’s Bond Rating

Slide 1

• Each of the credit rating agencies has its own approach to evaluating the credit risk of public university credits.

• All agencies use a combination of qualitative and quantitative factors to assess the credit quality.

• Credit ratings are assigned only upon request by an issuer of bonds, typically at the time a new bond is being sold.

• Each rated issuer is subject to annual surveillance.

• Costs associated with a bond rating that are paid by the university:

o A fee at the time of bond issuance

o An annual surveillance fee

Credit Rating Process

Slide 2

• When new bonds share a lien with outstanding bonds, all “parity obligations” will carry the same rating. Therefore, any rating change (whether upward or downward) would apply to new and outstanding parity bonds.

Moody's S&P FitchAaa AAA AAAAa1 AA+ AA+Aa2 AA AAAa3 AA- AA-A1 A+ A+A2 A AA3 A- A-Baa1 BBB+ BBB+Baa2 BBB BBBBaa3 BBB- BBB-Ba1 BB+ BB+Ba2 BB BBBa3 BB- BB-B1 B+ B+B2 B BB3 B- B-Caa1 CCC+Caa2 CCCCaa3 CCC-Ca CC

CC D DDD\ \ DD\ \ D

Definition

Inve

stm

ent G

rade

Highest quality, lowest default risk

High quality, very low default risk

Upper-medium grade, low default risk

Medium-grade, low default risk

Spec

ulat

ive

Grad

e

Speculative, elevated vulnerability to default risk

Speculative, material default risk is present

CCC Very High credit risk

CCC High likelihood of default

In default

Credit Rating Process

Slide 3

Rating agencies will perform a holistic review of OSU and its component units:

Holistic Credit Review

Slide 4

OSU Credit Rating

OSU Foundation

and Agricultural Research

Foundation Performance

State of Oregon

- Funding Level

- Economic Outlook

Market Position

Enrollment Selectivity

OSU Long-term Strategy

and Goals Governance and

Management

Research Federal, State

and Local

Land-grant, Sea-grant,

Space-grant and Sun-grant

OSU Balance Sheet and Operating

Performance

• All rating agencies use a combination of qualitative and quantitative factors to assess credit quality.

• Key qualitative factors: o Background and history of the issuer

o Political and regulatory environment

o Management quality, experience, track record, and attitude toward risk

o Management and governance structure and communication

o Overall strategy and philosophy, strategic plan

• Need to convey: OSU is a land-grant institution with Carnegie Foundation’s top designation for research institutions and its prestigious Community Engagement classification, a long operating history, a highly regarded president and management team, and a well-qualified Board of Trustees.

• Qualitative factors can influence the rating.

Rating Approach – Qualitative Factors

Slide5

• Shown to the right are quantitative factors considered by Moody’s Investors Service.

• Based on FY 2013 financial statements, the quantitative factors alone indicate an Aa3 rating of the University.

Operating Revenue, 10%

Primary Selectivity, 5%

Primary Matriculation, 5%

Net Tuition per Student, 10%

Average Gifts per Student, 5%

Operating Cash Flow Margin, 10%

Average Debt Service Coverage, 10%

Revenue Diversity, 10%

Total Cash and Investments, 10%

Expendable Financial Resources to Direct

Debt, 5%

Expendable Financial Resources to

Operations, 5%

Debt to Operating Revenues, 5%

Monthly Days Cash on Hand, 5%

Monthly Liquidity to Demand Debt, 5%

Rating Approach – Quantitative Factors

Slide 6

• The rating agencies will be invited for an on-campus visit to tour the campus and meet with the President, Vice President for Finance and Administration, and executive management team.

• A key timing element is having audited FY2014 financials available at the time of the on-campus visit.

October 2014 November 2014 December 2014 January 2015 Spring 2015 Rating Process *

Preparation of Rating Material

October 16-17, 2014 OSU Board Meeting

Rating Agency On campus visit

Receive Private Ratings

January 15-16, 2014 OSU Board Meeting

Receive Public Rating

10-30 days prior to sale

Bond Sale

Update rating material

Request Public Rating

Timeline

Slide 7

Fall 2014 (in process)

* Tentative – actual timing will depend on target date for bond issuance.

Questions?

Slide 8