Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.forbes From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Hold that rating Date: Wed, 18 Nov 92 14:52:03 EST Message-ID: "Copyright 1992 Forbes, Inc. Any further reproduction or redistribution without the express written permission of Forbes and ACC is prohibited." Hold that rating The sports pages are full of college football rankings. Ever wonder how your team fares in the bond market? By William P. Barrett TWO MONTHS AGO Texas A&M beat Stanford 10-7 in their college football season opener. That's one reason the Aggies recently stood 5th in the Asso- ciated Press football ratings of Divi- sion I teams, while Stanford weighed in at 21st. But in the financial pages Stanford wins consistently. Its bonds carry a top AAA rating. Texas A&M is a couple of notches down, at AA. Those bond ratings are ultimately a much better measure of how the old alma mater is doing than what the sports pages tell you. And as an invest- ment, college bonds often aren't a bad bet in this uncertain credit market environment. While they typically yield about 20 basis points less than a comparable state general obligation bond, higher education credits are still a big busi- ness--approximately $8 billion were issued last year. They are generally exempt from federal taxes and aren't that volatile. Moreover, says Patrick Hennigan, a vice president at J.P. Morgan Securities Inc., historically colleges have very rarely defaulted on their debt. To rate the schools, Standard & Poor's looks at their complete finan- cial operations, plus such factors as alumni giving, state support and a school's ability to win government grants. Another key measure: wheth- er a school is filling its freshman class by lowering admission standards--a probable sign of declining demand for the school's product. The raters also examine attrition rates, and the presence of nationally recognized aca- demic programs. S&P currently rates about 400 insti- tutions. Only 6 receive the agency's highest marks: Stanford, Harvard, Princeton, Yale, CalTech and New York's Rockefeller University. What of the rest of the Ivy League? Columbia and Dartmouth are rated AA+, while Brown, Cornell and Penn are AA. All six top-rated schools enjoy heavy student demand, and thus some pricing ability to raise tuition. The interest rates reflects that security: Harvard's 5 1/2s, due 2015, for exam- ple, are currently trading above par and yield a modest 6.35% to maturity. Massachusetts state general obliga- tion bonds of similar maturity yield 6.7% to maturity. Because S&P usually won't rate a public university higher than or even equal to the parent state's general obligation bond rating, no state school carries an AAA rating. Most ''flagship'' state universities hold ei- ther an AA-, AA or AA+ rating. Penn State's 5 1/2s, due 2016 and rated AA-, yield 6.59% to maturity. Note that, as with other borrowers, universities' ratings can change. Though AAA-rated for now, Rocke- feller University carries a ''negative'' credit outlook by S&P partly because of its heavy reliance on uncertain fed- eral grant funding. Tulane (A+), Georgetown (AA-), Villanova (A) and Vanderbilt (AA) are also tagged with ''negative'' credit outlooks. A change in outlook sometimes pre- sages a rating change. In the last year schools in the Uni- versity of California and University of Illinois systems were downgraded be- cause of state funding crunches. Pennsylvania's Dickinson College suffered a rating downgrade, from A to A-. Reasons: heavy dependence on tuition income, competition from similar institutions and falling student applications; the latter has forced the school to accept 74% of all applicants this academic year, as opposed to a picky 40% in 1988. Schools toward the bottom of the investment-grade ratings include Se- ton Hall, Wagner College, University of Hartford, Susquehanna and the New School for Social Research. And New Jersey's Fairleigh Dickinson gets one of the very few non-investment- grade ratings (BB) among private schools, owing to financial losses and declining enrollments. Traders esti- mate the bonds carry a tax-free junk bond yield of 8%. Can you use bond ratings to predict football outcomes? Perhaps you can. Of the eight games so far this year between current Top 25 teams with unequal bond ratings, the lower-rat- ed team has won seven times. Fiscal and physical strength apparently do not go hand in hand.  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