Negative outlook for Mills debt

By
September 25, 2012

On Jul. 17, 2012, Moody’s Investor Services downgraded Mills College’s outstanding debt rating.

According to their website, Moody’s Corporation “is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets.”

Mills’ rated debt affected was $33.5 million. Moody’s downgraded Mills’ rating from Baa1 to Baa2 and revised the outlook from “stable” to “negative.” These rankings are part of the company’s index that measures a company’s credit risk and chances of defaulting if it wants to borrow money.

“The Baa rating is just above the middle (medium-grade) in Moody’s rating system,” President Alecia DeCoudreaux wrote in a memo on Aug. 2 to Mills Faculty and Staff. “Additionally, the outlook was revised from stable to negative; consistent with other rating decisions Moody’s has made for the higher education sector.”

Jamie Nickel, Interim Vice President for Finance and Treasurer at Mills, wrote in an email that Moody’s does a credit rating every 2-3 years. Mills’ credit was last rated in Mar. 2010.

In her memo, President DeCoudreaux said that the college has no plans to issue bonds or borrow money.

“The Baa2 rating reflects the college’s ongoing negative operating margins (Moody’s adjusted), thin unrestricted liquidity, and challenging competitive environment, offset by good financial cushions to debt and operations, conservative debt structure, and historically strong fundraising support, underpinned by a new president who is focused on building a multi-prong plan to return the college to fiscal and enrollment equilibrium,” the Finanzen reported.

Nickel explained that unrestricted liquidity refers to the college’s fund balances — which are net assets, or the difference between assets and liabilities that have no donor restrictions that the college — can convert to cash. Nickel also explained that the value of buildings, equipment, and real estate are excluded from the college’s unrestricted liquidity because it cannot be easily converted to liquid assets.

“Moody’s is pointing out that Mills currently has very low unrestricted, liquid balances,” Nickel said. “We have pretty strong donor-restricted balances, such as the endowments, but those must be used according to donor restrictions.”

Funds that are donor restricted — which means that the money can only be spent on a specific program, type of financial aid, or building — are considered temporarily restricted, according to Nickel. Other funds include balances that have a restriction as to when the college will receive them (such as outstanding donations or remainder interests in charitable annuities and trusts). This money also classified as restricted due to the funds’ time restriction.

“College funds that were given as part of the donor restricted endowments (the vast majority of Mills’ current investments) have a permanent restriction associated with them in that the college can

only spend a reasonable amount annually from these funds,” Nickel explained in an email. “The spending essentially comes from the net return on the endowment investments and is typically a percent of the market value of the investments.”

High endowment spend rates is also another aspect that Moody’s found to be a negative operating margin. The spend rate refers to the percentage of endowment market value removed from invested endowment funds and what is spent annually by the college according to donor restrictions.

“Mills has relied on spending from the endowment investments to support about 20% of the college’s operating budget expenses, including student financial aid,” Nickel said. “Due to the decline in the value of endowment investments when the economic crises occurred and Mills’ reliance on the endowments to support operating costs and financial aid, our current spent rate is at seven percent, which is high.”

Moody’s prefers that Mills’ endowment spending to be five percent, which the college and the board will be working toward.

“The current endowment spending policy approved by the board has a seven percent payout ceiling,” Nickel said. “A high spend rate puts pressure on the ability of the endowment investments to grow in value and provide future support.”

In Apr. 2010, The Campanil reported that Moody’s downgraded Mills’ rating from A3 to Baa1.

Former President Janet Holmgren said to The Campanil on Apr. 10, 2010 that she did not expect the College to exercise any layoffs or personnel-related cuts.

“We do not want to cut into our retention efforts,” Holmgren said. “We do not want to cut into our quality of education.”

Holmgren said that she wanted to hand Mills over in a strong position financially to the next president of the college.

“We have weathered this crisis well, and we will continue to weather it well, but we have to be fairly frugal,” Holmgren said.

Holmgren was replaced by Alecia DeCoudreaux as Mills College President in 2011.

Six members of the Mills staff were laid off on Nov. 30, 2011, during the first semester of DeCoudreaux’s presidency. Since then, numerous staff members have left the college including Dr. Joi Lewis and Andrew Workman.

DeCoudreaux declined to comment for this article.


Negative outlook for Mills debt was published on September 25, 2012 in News

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