Moody’s and U. confirm Princeton’s Aaa rating

Moody’s had previously assigned a negative outlook to the higher education sector in the midst of the financial crisis in 2009, but then upgraded the status of the nation’s most elite institutions to “stable” in 2011.

The recent downgrade reflects a broader diagnosis of risk in financial markets and uncertainty in Washington, D.C., Moody’s spokesperson David Jacobson said.

“The fact that we changed the outlook on research-driven institutions to negative says that we think there are more elements of risk in the market, which we see in diminishing returns on University endowments,” Jacobson explained. “There’s also added pressure to find funds for research and financial aid as a result of government sequestration.”

Princeton’s endowment returned 3.1 percent in the last fiscal year, down from 21.9 percent and 14.7 percent in the two previous years, respectively. This year’s modest return stands in stark contrast with the -22.7 percent return the endowment received in 2009, at the height of the financial crisis.

Yale noted a return of 4.7 percent, Harvard posted a loss of 0.05 percent in the 2012 fiscal year and Dartmouth outpaced all the other Ivies with a positive return of 5.8 percent.

The University’s endowment was valued at $17 billion in June 2012, ranking it fifth among all U.S. institutions. On a per student basis, the University’s endowment is the largest in the world.

Although Moody’s assessment of the higher education sector is relatively bleak, Jacobson noted that both Princeton and the Ivy League as a whole were in better positions than other research-driven institutions to weather adverse financial conditions, partially due to their ability to limit tuition hikes.

“There are some highly-rated universities that are able to limit their price increases because they’re able to draw from their endowments, even if those endowments aren’t performing particularly well,” he said.

University Vice President for Finance and Treasurer Carolyn Ainslie agreed with Jacobson’s assessment, noting that the University’s credit rating was likely to remain stable in the foreseeable future.

“Fortunately, a lot of these concerns about universities in general don’t apply to us,” she said. “[Moody’s] worried about philanthropy levels, but we just came off a very good year of donations. We have incredibly high demand for enrollment, and our financial aid has stabilized.”

In the recently announced budget for the 2013-14 school year, funds allocated to financial aid increased 4.6 percent to $121.4 million, while undergraduate fees rose 3.8 percent.

Moody’s last assessed the University’s credit rating in August, when it upheld its Aaa rating, the highest possible score. The rating was also categorized as “stable,” indicating that the firm does not anticipate the University’s credit status to change in the next 12 to 18 months.

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Credit rating is an important indicator of financial health, since lenders use these ratings to set interest rates on debt the University takes on. “The higher your rating, the more credit-worthy you are and the lower the [interest] rate,” Ainslie explained.

Whenever the University seeks a debt issuance, administrators meet with representatives from both Moody’s and the credit agency Standard and Poor’s to evaluate the University’s finances.

While Thompson characterized the University’s current balance sheet as “very good,” he did point to an upcoming peak in “debt service” — a payment due date — in 2019 as a potential challenge.

In January of 2009, the University took on $1 billion of taxable debt, structured such that the principle is due to be returned through bullet payments in 2019 and 2039. Ainslie said that the University had planned well in advance to ensure repayment of the debt and will begin liquidating some assets in 2014 to free capital.