This past December, Moody’s Investor Service affirmed Kenyon’s bond rating at A1 and upgraded the College’s outlook for Kenyon’s debt outlook from “negative” to “stable.”
According to their website, Moody’s explained that “the revision of the rating outlook to stable is based on [Kenyon’s] improved operating performance in [fiscal year] 2014 and our expectation that cash flow will remain highly positive and that growth in financial resources will outpace peers.”
Better known for rating for-profit companies and issuing data on publicly traded companies, rating agencies like Moody’s also review finances of nonprofits, including institutions of higher education.
Debt held by a corporation comes in the form of bonds. When a corporation sells a bond it makes a contract with the buyer, exchanging immediate money for an obligation to pay back the money, plus interest, at a later date. Kenyon currently carries $189 million in rated debt. This does not take into consideration the additional $2,414,234 in debt that Kenyon holds as part of a mortgage guarantee program offered to certain employees).
Joseph Nelson, Kenyon’s vice president for finance, explained that in 2013 Moody’s downgraded Kenyon’s outlook to negative due to what he called “back-to-back years of operating loss under generally accepted accounting principles.” Because of new buildings opening in the last several years, such as the Gund Gallery and Horvitz Hall, and a $7.5 million conservation initiative, Kenyon was spending a lot of money on utility items like light bulbs and toilet fixtures that cannot be bought with borrowed money. These purchases were not backed up by bonds, so “it all hit the bottom line,” according to Nelson, who said the expenses all appeared as losses on the balance sheet.
President Sean Decatur shrugged off the downgrade as a misinterpretation.
“They were not interpreting some data in the way that we would interpret the data,” he said. Decatur expressed that the rating change ”doesn’t have much of an immediate impact on us” nor should the year spent at a negative rating have a long-term impact on the College’s financial health. Nelson explained that it is normal for the College’s budget to be stable and that the conservation project was the primary reason for the downgrade in 2013.
Moody’s placed its rating of Kenyon’s debt (bonds) at A1 on a rating scale that ranges from Aaa to C, with the numeral one indicating that Kenyon is on the higher end of the single-A ratings. The Moody’s “General Credit Rating” guide explains a single-A rating as “considered upper-medium grade and subject to low credit risk.”
Nelson remains positive about the outlook: “Everything else about us looks like a double-A credit,” he said. Nelson attributes the debt to the new buildings and conservation initiative, but said he believes these projects are worthwhile because the conservation will save money in the long run and new buildings attract students. The projects led to two years of operating loss, and according to Nelson, Moody’s “noted that trend and as much as we tried to explain its not a trend, its an outcome, we didn’t prevail.” The College failed to make this point in part because “the year where they took us from stable to negative it [the presentation to Moody’s] was a telephone interview and I think it matters to be there in person,” Nelson said.
The rating for a college incorporates many factors beyond just what can be seen on the balance sheet. Nelson explained that one reason for the stable rating was a successful presentation to Moody’s this year. He said the rating agencies “have to have confidence in the management team, and not just financial management teams either … They need to know that our admissions staff knows what they’re doing.” Rating agencies even take a college’s acceptance rate into consideration, though Nelson considers that a good thing.
Looking forward, Nelson and Decatur project that Kenyon will stay “stable” for some time to come and that the College is making the right steps to prove that it is financially stable. However, Nelson says that ultimately, if the rating agencies “don’t think you can pay the bondholder, … you’re going to get a bad rating. Nelson maintained that the quality of the institution is important but the rating is “at the end of the day … a pretty quantitative assessment.”