2013 Hot Topics in Higher Education Finance

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1 2013 Hot Topics in Higher Education Finance March 27, 2013 Doug Brown Terri Wesolik Director Senior Vice President Wells Fargo Securities Wells Fargo Bank, N.A g terri.wesolik@wellsfargo.com

2 WCCI Member Ratings, Issuance, and Borrowing Costs mber Nu Ratings of WCCI Members Estimated Borrowing Cost (20-yr maturity) WCCI New Issuance: Present Rating Spread to MMD (bps) Current 20-yr MMD Yield to Call Yield to Maturity AAA % 2.8% 3.67% AA % 3.0% 3.80% AA % 3.1% 3.86% AA- 2.7% 3.30% 3.9% A % 3.0% 4.07% A % 3.6% 4.16% A % 3.7% 4.23% BBB % 3.8% 4.29% BBB % 3.9% 4.3% BBB % 4.1% 4.47% Note: Assumes a traditional premium bond structure with a standard 10-year par call. $400 $30 $300 llions Mi $20 $200 $10 $100 $272 $334 $0 $0 $79 $ YTD Sources: Thomson Reuters SDC and MMD, as of 3/2/2013 2

3 Financing Online Education Initiatives How are They Funded? Rating Agency Comments* For partnerships, generally the institution Opportunities: Broader geographic enrollment, low contributes the brand cost of development, new revenue opportunity Small capital investment Risks: Brand dilution, competition and pricing Generally, not with debt (uncertain returns) Impact of risks could manifest in 3- yrs Uncertainty around start-up costs and revenue streams Online programming a part of revenue diversification efforts Examples of Online Higher Education Middlebury Interactive Languages $4 mm investment for 10% ownership stake Funded with bank loan Partnership with K12, Inc. The Regents of the University of California UC Online: $6.9 mm interest free loan from the Office of the President MOOCs: Berkeley/EdX, Irvine/Coursera, UCSF/Coursera Governor Brown initiatives *Source: Moody s report, Shifting Ground: Technology Begins to Alter Centuries-Old Business Model for Universities dated Sept 12, Standard & Poor s report, U.S. Higher Education Sector Could Experience A Rise in Rating and Outlook Changes in 2013 dated Feb 2,2013. Fitch report, 2013 Outlook: U.S. Colleges and Universities dated Dec 11,

4 Tax Reform: Threats to the Tax Exemption? President Obama s Proposed 28% Cap on Itemized Deductions House Republican Efforts to Lower Marginal Tax Rates & Broaden Base Eliminate Loopholes and Tax Expenditures to Reduce Deficit Scrutiny on Private Activity Bonds that Benefit Corporations or Wealthy Institutions Uncertainty of Future Value of Tax-Exemption Increasing Use of Taxable Debt 4

5 Select Higher Education & Nonprofit Healthcare Taxable Issuance ( YTD) 30-Year UST Rates and Recent Taxable Pricings (Yield on Final Maturity Represented).00% 4.0% 4.00% Northwestern (Aaa/AAA/AAA) $200mm (2047): 3.40% UST + 80 bps = 4.20% yield Columbia (Aaa/AAA) $100mm (2042): 3.03% UST + 80 bps = 3.83% yield Cal Regents (Aa2/AA-/AA) / $100mm (2041): 2.4% UST bps = 4.0% yield Wake Forest Univ (Aa3/AA) $12mm (2042): 2.4% UST + 12 bps = 3.70% yield Amherst $100mm (Aaa/AA+) (2042): 2.79% UST bps = 3.79% yield Yale New Haven Hosp. (Aa3/A+) $132mm (2043): 3.17% UST bps = 4.37% yield 3.0% 3.00% 2.0% 2.00% 1.0% 1.00% 0.0% Avg: 2.96% Stanford (Aaa/AAA/AAA)$143mm (2042): 3.31% UST + 70 bps = 4.01% yield Mayo Clinic (Aa2/AA) $300mm (2043): 2.77% UST bps = 3.77% yield GW Univ.(A1/A+/-) $170mm (2043): 3.21% UST + 11 bps = 4.36% yield Johns Hopkins U (Aa2/AA/AA+) $3mm (203): 3.23% + 8 bps = 4.08% Wash Univ (Aaa/AAA) $200mm (2047): Univ of Chicago $190mm (Aa1/AA/AA+) (2042): 2.9% UST bps = 3.69% yield 3.1% UST + 13 bps = 4.68% yield* NC State U (Aa1/AA/-): / $142mm (2041): Ohio State t (Aa1/AA/AA) $24mm (2032): 3.18% + 82 bps = 4.00% yield Notre Dame (Aaa) $100mm (2043): 2.67% UST + 10 bps = 3.72% yield Dartmouth (Aa1/AA+) $10mm (2043): 2.71% UST + 10 bps = 3.76% yield 2.8% UST bps = 3.68% yield (implied 30 year spread: UST +12 bps) Mayo Clinic (Aa2/AA/-): $300mm (2047): 3.06% bps = 4.00% yield Cal Regents (Aa1/AA/AA+) $01mm (2039): 3.112% UST + 11 bps = 4.262% yield* Loyola Marymount Univ (A2/-/-) $37mm (2043): 3.22% UST + 10 bps = 4.727% yield UNC CH (Aaa/AA+/AAA) $127mm (2032): 2.70% UST + 90 bps = 3.60% yield 0.00% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 30-Year UST Avg. of 30-Year UST Higher Ed. Transaction Healthcare Transaction *10-year par call included Source: Bloomberg, Thomson Reuters, as of 3/2/

6 Update on Bank Credit Markets: More Regulation & More Competition Original Basel III Proposal* January 2013 Revised Proposal Potential Effect for WCCI Institutions Liquidity idi Coverage Ratio: Stress Scenario: Assumed draw on High Quality Assets / Net Cash liquidity facilities reduced to 30% from Outflows Over 30 Day Stress Period 100%; Assumed bank deposit losses reduced to 3% from % >= 100% Broader definition of High Quality Assets Longer LOC tenors Better LOC pricing Lower cost to move swaps to a preferred counterparty Implementation: 100% by 201 Phased in between 201 and 2019 General Credit Markets Continued bank preference for funded assets (direct purchase) Many new entrants providing direct purchase facilities, including smaller banks with ratings too low to provide LOCs Credit pricing has tightened amid lower variable rate issuance Cross Sell for traditional bank products and relationship banking important for best credit terms and pricing Fewer AA banks after Moody s downgrades in June 2012 Increased costs / capital adequacy provisions shifting risk to borrowers for changes to regulations / tax code *Source: Basel III International framework for liquidity risk measurement, standards and monitoring. Basel Committee on Banking Supervision. December

7 Floating Rate Note (FRN) Market As Alternative to Bank Credit Support FRN Sales by Put Type Investors typically prefer a hard put or maturity structure Put Type Soft Put 26% Hard Put 37% Hard Maturity 37% However, a soft put mitigates refinancing risk if bonds cannot be remarketed or refinanced (in a hard put structure,a failed remarketing is an event of default) Most soft put structures incorporate a step-up rate in the event bondsarenotremarketed d Maturity Number Year 2 Year 3 Year 4 Year Year 6 Year 7 Year 8 Year FRN Sales by Maturity The greatest demand for FRNs is concentrated between 1- years 86% of all sales have matured between these years Longer final maturities generally incur a penalty, but mitigate refinancing risk Many issuers have sought to stagger maturities by utilizing multiple tranches with varying maturities Rating Number FRN Sales By Rating Category 1 1 Majority of FRN issues to date have had a AA rating However, FRN market has opened to lower rated credits over the last two years A issuers: Loyola Marymount University, Baylor College of Medicine, Memorial Hermann Health System BBB issuers: Phoenix Children s Hospital Sources: EMMA, Bloomberg; as of 3//2013; data includes sales since January

8 Recent Wells Fargo Higher Education and Not-for-Profit Senior Managed FRNs Vanderbilt University UNC Chapel Hill University of Michigan J. Paul Getty Trust Boston University (Pending) $67,000,000 March 22, 2012 $100,000,000 July 12, 2012 $9,970,000 Dec 11, 2012 $81,490,000 March 26, 2013 $62,69,000* April 2013* Ratings Aa2/AA/AA+ Aaa/AA+/AAA Aaa/AAA/NR Aaa/AAA/NR A1/A/NR Index SIFMA 67% 1M LIBOR SIFMA SIFMA SIFMA Spread TBD Term 3 Years Years 2 Years 3 Years 4 Years* Put Feature Hard Put Soft Put Soft Put Soft Put Soft Put Use of Refund VRDBs New Money & Refund VRDBs Refund VRDBs Remarketing of Proceeds Refunding bonds currently in and Objectives VRDB mode Reduce liquidity requirements Reduce size of CP and bank lines of credit Diversify portfolio and reduce liquidity needs Refinance existing put bonds Reduce bank credit needs *Preliminary, subject to change in price and/or availability; when, as, and if issued 8

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