October 1, 1997
When a university student noticeably improves his performance, his work is often recognized with a higher grade. The same holds true for the university. In July, New York-based publisher Standard & Poor's raised Tulane's bond rating from A to A+.
According to the company, the university's general obligation bonds were upgraded to reflect "the university's strengthened balance sheet due to the 1995 sale of its hospital, an endowment of more than $450 million, strong student demand, improved student quality, break-even financial operations and stable enrollment."
Standard & Poor's grades bonds according to the issuer's capacity to pay interest and repay principal. Bonds can be rated as low as D, for default, and as high as AAA+. In S&P's rating system, Tulane is five positions from the highest grade possible.
"A+ is a good rating," says Mary Peloquin-Dodd, a director of public finance with Standard & Poor's and an analyst who follows Tulane. "Most colleges and universities in the country couldn't achieve an A+ rating."
Tulane typically floats general obligation bonds to fund major construction projects. The university will benefit from the upgrade on any future bonds issued. The primary beneficiaries now are those who purchased university bonds. Like stocks, bonds are traded on the open market, and a higher bond rating typically means a higher market price.
As far as Tulane is concerned, the real benefits of a higher bond rating won't be seen until the university's next bond offering.
"The higher your bond rating, the lower your borrowing cost is when you issue new bonds," explains Peter Ricchiuti, assistant dean at the Freeman School and former assistant state treasurer for Louisiana. "Borrowing at a lower cost means one of two things: Tulane is going to be able either to build more for the same dollar amount or to not spend as much to build the same facility. We're going to get more bang for the buck."
The interest rate, Ricchiuti adds, is typically the key factor in determining the cost of a project, more significant than, for example, raw materials. "A change in bond rating that reflects a change in interest rate is about the greatest thing that can happen to any school with broad expansion plans," Ricchiuti says.
Another benefit of the upgrade is that an A+ rating may widen the market for Tulane bonds. "A lot of times, big institutional buyers have the criteria of only investing in bonds that are, say, A+," Ricchiuti notes. "All of a sudden, we're a blip on their radar screens. The bonds would be attractive to a new class of investor. It would widen the market for our bonds."
And while fiscal rewards are gratifying, Ricchiuti says the rating reflects not so much current conditions at the university as its past and future.
"Standard & Poor's are backing up and trying to look for future trends," Ricchiuti says. "The hospital sale was a one-time item that's helping the finances of the school a lot, but our student quality and strong enrollment, those are long-term trends that make them feel more confident about the university. They're making projections that everything is going to be better."
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