COVID-19 Credit Impacts on Privatized
Student Housing, Parking, Utility, and Other
Higher Education P3s
John Medina, Dennis Gephardt, Tom Song
October 30, 2020
Agenda
1.
2.
3.
4.
University Credit
Privatized Student Housing Projects
PPPs, parking, utility and projects in construction
Q&A
Higher Education PPP Summit, October 2020
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Severity of COVID-19 credit impact on Higher
Education projects spans the risk spectrum
High level view of sectors most negatively affected, least affected, by COVID-19
» Toll roads
» Parking
» Stadiums / arenas
» Non cruise ship ports
» Privatized Student Housing
» Availability payment PPP in
construction
» Long-term contracted energy
projects without market risk
» Airports: car rentals
SOMEWHAT
AFFECTED
» Coal power generation
LEAST
AFFECTED
MOST
» Air navigation systems
AFFECTED
» Cruise ship ports
» Availability payment PPP in
operations
» Airports
LOW
HIGH
Severity of COVID-19 impact
Higher Education PPP Summit, October 2020
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1
University Credit
Today’s topic: Higher Education
Public finance sector with the highest risks under the coronavirus crisis
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Rating actions reflect prior conditions & COVID-19
18 of the 27 downgrades previously carried negative outlooks
Downgrades have outpace upgrades since 2008
YTD downgrades have increased
120
Upgrades
Downgrades
45
40
100
35
80
30
25
60
20
15
40
10
5
20
0
0
Upgrade
Downgrade
Moody’s Investors Service, as of October 13, 2020
Affirmation
Source: Moody’s Investors Service; 2020 YTD is as of October 13, 2020
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Auxiliary revenue impacted by lower usage
Uncertainty around auxiliaries’ profitability, especially those with debt
Declining auxiliary revenue reduces fiscal
flexibility
Profitable
Auxiliary debt service coverage diminishes
with decreasing revenue
Not profitable
<1x DSC
100%
100%
90%
90%
80%
80%
70%
70%
>1x DSC; <2x DSC
15%
20%
>2x DSC; <4x DSC
>4x DSC
13%
13%
29%
28%
40%
60%
60%
49%
50%
50%
29%
40%
33%
40%
30%
30%
31%
20%
20%
10%
24%
25%
10%
0%
31%
14%
FY 2019
Stress scenario 1
(revenue down 25% /
expenses down 12.5%)
Stress scenario 2
(revenue down 50% /
expenses down 25%)
Stress scenario 3
(revenue down 75% /
expenses down 50%)
7%
0%
FY 2019
Stress Scenario 1
Stress Scenario 2
Profitability defined as when auxiliary revenues are greater than auxiliary expenses; data may not
fully incorporate depreciation and interest expense.
Projected debt service coverage under multiple revenue decline scenarios.
Source: Moody’s Investors Service
Source: Moody’s Investors Service
Stress Scenario 3
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PPP strategies provide an additional resource for funding capital assets
Debt
Private
partner
investment
Equity
Capital
program
Government
funding
Operating
cash flow
Gifts
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Partnerships offer potential opportunities and challenges
Potential opportunities
Potential challenges
•
Access to an additional “tool” to finance capital needs
•
Higher cost of capital, and loss of both cash flow and
pledged revenue for demand risk PPPs
•
Ability for a university to leverage third-party expertise, •
specify exact level of service desired, and determine how
much control it would like to retain
Potential long-term exposure to a private partner with
weaker credit quality
•
Faster construction timeline and approval process,
allowing for quicker project availability
•
Transfer of project operations to private partner may limit
university ability to step-in or make changes if they are not
contractually agreed to
•
Protection against project underperformance
•
•
Potential cost savings during construction and over
project life cycle due to private sector expertise
•
Inability to transfer demand risk to private partner,
potentially causing unexpected costs if project demand
deteriorates
Loss of ability to determine pricing for demand risk student
housing PPPs, driving up total cost of attendance
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Campus of the future: How will business model
changes impact capex?
Deferred maintenance and competitive facilities investments compete with technology changes
16
14
Age of plant
12
10
8
6
4
2
0
2010
2011
2012
2013
2014
Private university median
2015
2016
2017
2018
2019
Public university median
Source: Moody’s Investors Service
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2
Privatized Student
Housing Projects
Taking stock – how to catch a falling knife
Negative outlook going into spring due to distressed fall occupancy rates
October 30, 2020
October 1, 2020
32
Total
12
28
Total
16
24
Stable
4
19
Stable
4
4
Negative
6
7
Negative
11
4
Watchlist (RUR)
2
2
Watchlist (RUR)
1
Investment-grade
Source: Moody’s Investors Service
Speculative-grade
Investment-grade
Speculative-grade
Source: Moody’s Investors Service
10 rating actions in the last 30 days demonstrates vulnerability to rapid deterioration
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Fall’s lessons help prepare for spring’s melt
Hybrid learning model led to heightened lease cancelations
» Rating actions considered:
Learning models of four-year institutions
– performance through end of academic year
– spring occupancy consistent with fall’s
– additional liquidity sources before DSRF
» Project’s strategic importance to university
Primarily or fully online
14%
Hybrid
31% 37%
34%
Primarily or fully in-person
31%
TBD
22%
» Demonstrated or contractual support provisions
Other
26%
Source: Davidson College College Crisis Inittiative (C2i); Moody’s Investors Service
Inner Ring Data as of 08/21/2020
Outer Ring Data as of 09/09/2020
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3
PPPs, parking, utility and
projects in construction
Severity of COVID-19 credit impact on Higher
Education projects spans the risk spectrum
High level view of sectors most negatively affected, least affected, by COVID-19
» Toll roads
» Parking
» Stadiums / arenas
» Non cruise ship ports
» Privatized Student Housing
» Availability payment PPP in
construction
» Long-term contracted energy
projects without market risk
» Airports: car rentals
SOMEWHAT
AFFECTED
» Coal power generation
LEAST
AFFECTED
MOST
» Air navigation systems
AFFECTED
» Cruise ship ports
» Availability payment PPP in
operations
» Airports
LOW
HIGH
Severity of COVID-19 impact
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Limited negative credit implications at this point
PPPs in construction and operations adapt to new risks
Possible consequences on projects
Limited credit implications
» Global supply chain disruptions had less of an
impact for university PPPs
» Lower construction productivity and
operational constraints continue
» Project companies typically pass through risk
of delays and cost overruns to construction
contractors or operating services provider that
have adapted and adjusted to the new normal
» Protracted negotiations of COVID-19 claims
put strain on the relationships between project
parties
» Most project companies benefit from adequate
liquidity to withstand delays and others have
concession tails with long-term equity value
» Deterioration of some key project parties’
credit quality over time (i.e. contractors,
operators, off-takers)
» Credit impact over time depends on the depth
and severity of the crisis and where the
project stands in the construction cycle or in
its operating life
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University off-taker ratings remain strong
Utility/energy related and availability payment projects have high rated off-takers with stable credit quality
University
Purdue University, IN
Dartmouth College, NH
Northwestern University, IL
Ohio State University, OH
State University of Iowa, IA
University System of Maryland, MD
Regents of the University of California
University of Kentucky, KY
Syracuse University, NY
University of North Dakota, ND
University of Idaho, ID
Duquesne University of the Holy Spirit, PA
Louisiana State University, LA
Montclair State University, NJ
Georgetown University, DC
Rating
Aaa
Aa1
Aa1
Aa1
Aa1
Aa1
Aa2
Aa2
Aa3
Aa3
A1
A2
A2
A2
A3
Outlook
STA
STA
STA
STA
STA
STA
STA
STA
STA
STA
NEG
STA
STA
STA
STA
*yellow highlighted have announced projects only while others have already closed or are about to close a project
Higher Education PPP Summit, October 2020
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Parking projects’ site specific demand profiles
impact credit amid COVID-19
Eastern Michigan University
» Initial Baa1, stable rating assigned July 2018
University Hospitals Cleveland
Medical Center (UHCMC)
» Performed as forecast for 2 years pre-COVID
» Initial A3, stable rating assigned August 2020
» Parking assets within 1.5 sq mile area at main campus of
Eastern Michigan University (A2, NEG)
» Parking facilities at UHCMC, flagship facility and
principal subsidiary of University Hospitals Health
System Inc. (A2, STA)
» 35-year concession with 5 year tail
» 75% of revenue from permit sales to students, faculty and
staff provides more stable foundation compared to a fully
transient demand profile
» Primarily commuter school cancelled in person instruction
mid-March 2020 through the summer
– Downgraded to Baa2/RUR in May 2020
» Return to some in person instruction Fall 2020 and
adequate liquidity as long as some demand returns
– Confirmed Baa2, negative in Oct 2020
» 50-year concession has long-term value
» 50% of revenue from employees at UHCMC
» Transient demand down 50% at COVID-peak and down
30% in August and recovering
» Close connection with grantor
– Retains capital and maintenance expenses
– Receives excess cashflow
– Establish Parking Rate Stabilization Fund
Higher Education PPP Summit, October 2020
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Potential impact of COVID-19 on future projects
Future projects will likely be affected
» Risk allocation changes around pandemic/epidemic
» Delayed procurement of some projects while others continue to progress
» More contingency in price and schedule to balance uncertainties, especially if
pandemic/epidemic is not covered in risk allocation
» More security to offset weaker contractors
» More clarity on change in law provisions on health and safety
» Additional liquidity for all projects but mostly for demand risk
» New procurement methods to provide greater completion certainty around
price and schedule including more pre-development agreements and flexible
fixed price, date certain contracts
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Q&A
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