Downturn Color Debt Decisions
Adverse changes in the financial markets have turned debt management into a fine art. See how two institutions moved past the credit crunch, adopting nontraditional options for painting liquidity back into the institutional picture.
As the credit freeze continues to thaw, the liquidity scramble that accompanied the 2008 downturn has left indelible memories in the minds of most chief business officers. As the online Perspectives publication "New Realities in the Bond Market" (NACUBO, 2011) described it: "The recent credit crunch dramatically changed the structure of debt financing for higher education. Before, institutions could buy bond insurance to improve their credit ratings, thereby reducing interest rates. Insurance, however, has nearly disappeared as a debt management tool. At the same time, credit agencies have introduced tougher credit standards, in response to government pressure and because their credit ratings did not adequately forewarn investors of risk associated with debt instruments."
Not surprisingly, the white paper explains, "As a result, boards of trustees, presidents, and chief financial officers must judiciously balance the cost and constraints imposed by new capital projects funded by debt with the impact that debt inflicts on the institution's financial capacity to deliver on its mission."
Following are two case studies describing (1) a research university that did a remix of its debt structure and (2) a small institution that discovered the benefits of private debt placement.