Kroll Releases New Methodology for NFP Higher Education

Kroll Bond Rating Agency released a description of its methodology for rating not-for-profit higher education, a sector that's shown signs of stabilizing.

KRBA said the key determinants in its analysis are management and planning, institutional demand and profile, finance and debt. KBRA said its report last week was intended to provide guidance and insight on how the four determinants are applied when making a rating assignment.

"Our approach recognizes the importance of qualitative factors, including management and trends, which support the quantitative measures of our analysis," Jenny Maloney, director in the public finance group at KBRA, told The Bond Buyer via email.

The report comes after Moody's Investors Service revised its outlook on the sector from negative to stable in August. Moody's said pockets of stress will persist with roughly 20% of public and private universities experiencing weak or declining revenue growth owing to limited pricing flexibility and fundamentally challenged student demand. Standard and Poor's has a negative outlook on the sector.

KBRA said its analysis combines both qualitative and quantitative factors and emphasizes the assessment of the strength of management, which critically impacts the other key rating determinants, and a review of trends to put current metrics in greater context. Management is assessed qualitatively, as are historical trends and projections of the other three rating determinants and certain aspects such as program strength and capital planning.

Most other sub-determinants related to non-management rating determinants are measured using quantitative metrics. KBRA reviews the components of each rating determinant on an absolute and relative basis to determine the overall credit quality of the entity.

KBRA will also typically apply a stress test to test certain financial metrics during the rating process.

"The goal in this process is to fully assess the ability of a college or university to make in-full and timely debt service payments without additional sources of revenue which may not be sustainable at elevated levels," according to the report. "Stress testing scenarios would be tailored to the issuer and based on scenarios that KBRA reasonably expects the issuer to experience. In general, stress test scenarios may be described in the KBRA rating report."

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