February 25, 2024

Moody’s Gives Colleges a Negative Grade

The credit reporting agency Moody’s said on Wednesday that it had revised its financial outlook for colleges and universities, giving a negative grade to the entire field.

For the last two years, Moody’s Investors Service gave the nation’s most elite public and private colleges a stable forecast while assigning a negative outlook to the rest of higher education. (Moody’s assigned a negative outlook for the sector in 2009, but it upgraded the most elite ones to stable in 2011-2012.)

On Wednesday, Moody’s explained the change by saying that even the best colleges and universities faced diminished prospects for revenue growth, given mounting public pressure to keep tuition down, a weak economy and the prospect that a penny-pinching Congress could cut financing for research grants and student aid.

The report advocates “bolder actions by university leaders to reduce costs and increase operational efficiency.”

“The sector will need to adjust to the prospect of muted revenue growth,” the report says. “Strong governance and management leadership will be needed by most universities as they navigate through this period of intensified change and challenge.”

While Moody’s gave a negative outlook for the overall industry, most of the nation’s top colleges and universities still carry the top credit rankings.

Nonetheless, the Moody’s report reflects a time of rapid and disruptive change in higher education. Before the financial crisis, colleges and universities routinely raised tuition and fees as administrators sought to burnish their reputations — and the school’s rankings — with new buildings and more student services.

That golden era was upended by the financial crisis. As household income dropped and jobs became scarce for college graduates, families became increasingly vulnerable to college costs and the prospect of students taking on onerous debt. At the same time, institutions could no longer count on an annual windfall from endowment returns, alumni gifts and state financing. All shriveled as the economy soured, and they have not fully recovered.

In the 2011-2012 academic year, for instance, American families spent, on average, 5 percent less on higher education than in the previous year, Moody’s said. As a result, 25 percent of the private colleges that Moody’s rated did not raise tuition in fiscal 2011 at or beyond the rate of inflation; 21 percent of rated public universities did not do so.

Students have become more dependent on federal grants and loans since the financial crisis. Any curtailment of federal aid could put further budget pressures on schools. Pell Grants for low-income students provided $36.5 billion to colleges and universities in fiscal 2011. That represented a median 21 percent of net tuition revenue for regional public universities.

The rapid emergence of online learning provides both opportunities and challenges for higher education, Moody’s said. While online classes could threaten to undermine the residential college model, they could also provide new ways to make money and provide schools with broader audiences.

Moody’s said the average debt burden for full-time students grew 55 percent in the 10 years that ended in 2012. But it maintained that the average debt load was manageable for most students, since 72 percent of student loans were held by borrowers with less than $25,000 in debt. Nonetheless, the report noted that the increasing focus on student debt and college affordability by the media and politicians puts additional pressure on college administrators to rein in costs.

“Until universities demonstrate better ability to lower their cost of operations, perhaps through more intensive use of online classes and elimination or reduction of tenure, we expect government officials to produce bolder solutions in response to the public outcry against the cost of higher education,” the report said.

Article source: http://www.nytimes.com/2013/01/17/business/moodys-outlook-on-higher-education-turns-negative.html?partner=rss&emc=rss

DealBook: A Sober New Reality in Credit Downgrades for Banks

Moody's downgraded 15 big banks, noting the changing nature of their Wall Street operations.Mark Lennihan/Associated PressMoody’s downgraded 15 big banks, noting the changing nature of their Wall Street operations. Graphic Graphic: Taken Down a Notch or Two

When a consumer’screditscore drops, it is hard to recover financially. Wall Street firms could face the same fate.

Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup all suffered credit ratings cuts on Thursday. The rating agency Moody’s Investors Service said that, even though these banks had moved to strengthen their operations, their core trading businesses contained structural weaknesses.

In other words, the downgrades reflect the new sober era for Wall Street.

SinceMoody’sput the banks on warning in February, the firms have had time to brace themselves and the immediate impact of the cuts is not likely to be drastic. But banking industry analysts say they think Moody’s actions will cause lasting pain.

“It will make life more difficult for the banks over the long run,” said Andrew Ang, a professor of business at Columbia Business School. “The effect of ratings is pervasive.”

Ratings at Bank of America, which owns Merrill Lynch, and Citigroup, which has a large investment bank, were cut to Baa2. At that level, their creditworthiness is at the lower end of the investment grade, just two levels above junk. Morgan Stanley was downgraded to Baa1, three notches above junk, and Goldman was reduced to A3, four notches above junk.

In many ways, those cuts echo investor sentiment about banks with large Wall Street operations. The stocks of Goldman, Morgan Stanley and similar firms trade at valuations that are depressed by historical standards, an indication that investors harbor deep doubts about the industry’s long-term prospects.

But the sharply lower credit ratings may cause more stress in the same areas that prompted the downgrades.

One of those trouble spots is short-term borrowing. Wall Street firms need to finance their operations at a low cost to make profits, so they make heavy use of short-termloansthat last from a few days to a few months.

Since the financial crisis, banks have made great efforts to make this critical financing source safer, partly by backing this debt with higher-quality assets.

Even so, the downgrades could push up the costs of these loans. With a lower credit rating, lenders might think there is a higher probability that the banks won’t repay the money.

“These firms have large amounts of debt that they have to keep rolling over, and they will have to pay more to do that,” Mr. Ang said.

They could also feel the pain in theirderivativesbusiness. Derivatives, financial instruments whose value is linked to prices of bonds and stocks, can be a lucrative for banks, especially when they are specially tailored for the customer on the other side of the trade.

But these clients, to protect themselves, may now demand better terms with downgraded banks, like increased collateral. Wall Street firms would then have to decide whether to give up the business, or go along with client demands and face weaker profits.

“Some banks may have to relax their terms in order to win business,” said Paul Gulberg, a brokerage analyst at Portales Partners.

The downgrade could also widen the chasm in the industry. While most big banks were downgraded, some got hit harder than others. At the high end of the rating spectrum is JPMorgan Chase. Citigroup and Bank of America fall much lower down.

“The downgrades will change the competitive dynamics of Wall Street,” said Mr. Gulberg, who said JPMorgan had been steadily increasing its market share in important businesses over the last several years.

The situation could be especially acute in the derivatives.

To help insulate their profits from a downgrade, many Wall Street firms locate derivatives trades in bank subsidiaries backed by government-insured deposits. As a result, these subsidiaries have higher credit ratings than the parent companies.

Citigroup, Bank of America and JPMorgan Chase have more than 90 percent of their derivatives in such subsidiaries. Morgan Stanley only has 5 percent.

Notably, Moody’s didn’t warn of possible future downgrades for these subsidiaries. But it did say the parent companies had a “negative outlook,” the agency’s way of saying it still had doubts about their creditworthiness.

Given that threat, the banks may try to do as much business as they can in these higher-rated subsidiaries. That could face resistance, especially if bank regulators think it is risky business.

“The banks already have every incentive to use their bank subsidiaries, but it’s even greater after the downgrades,” said Dennis Kelleher, president of Better Markets, a lobbying group that is pushing for stricter financial regulations. “That’s why regulators need to be on guard and scrutinize everything the banks are doing, or moving into, these subsidiaries.”

The downgrades may also intensify competition from outside the traditional players on Wall Street. Asset managers like BlackRock are making inroads, sometimes bypassing Wall Street in the process. Bond trading, a huge source of revenue for firms like JPMorgan, is especially vulnerable.

The downgrades will only help the insurgents. For instance, Moody’s rates BlackRock A1, two notches above Goldman, and one level higher than JPMorgan.

Article source: http://dealbook.nytimes.com/2012/06/22/a-sober-new-reality-in-credit-downgrades-for-banks/?partner=rss&emc=rss

European Leaders Delay Summit Meeting Over Greece

In addition, the German chancellor, Angela Merkel, was crucial in resisting pressure for a meeting on Friday, arguing that it would be too early to deliver the comprehensive package of measures needed to restore stability to the euro zone, one official briefed on the discussion said.

Mrs. Merkel is not opposed to holding a meeting of euro zone leaders soon, said the same official.

Herman Van Rompuy, the president of the European Council, hoped to organize the meeting for next Monday or Tuesday, said the official, who was not authorized to speak publicly.

Other diplomats, who also were not authorized to speak publicly, suggested that the date might be later next week.

Meanwhile, the results of stress tests on European banks are due on Friday, promising another difficult landmark in a turbulent few weeks that have included credit downgrades for Portugal and Ireland and a tide of uncertainty engulfing the Italian bond and stock markets.

Pia Ahrenkilde Hansen, a spokeswoman for the European Commission, on Wednesday described as “incomprehensible” a decision Tuesday by the ratings agency Moody’s Investors Service to downgrade Ireland’s credit to junk status.

Another agency, Fitch Ratings, gave Italy a vote of confidence Wednesday despite the recent turmoil there, maintaining its rating on Italian debt. “In the absence of negative shocks, adherence to the fiscal targets set out by the government would be consistent with stabilizing Italy’s sovereign credit profile and rating at AA-,” it said.

Also Wednesday, the International Monetary Fund said that Greece must move quickly and decisively to bring its public debt under control.

“It is essential that the authorities implement their fiscal and privatization agenda in a timely and determined manner,” the fund said in a report, adding that “the debt dynamics show little scope for deviation.”

The backdrop to the continuing uncertainty was the failure of finance ministers from the 17 countries in the euro zone to conclude a comprehensive agreement Monday on a second bailout package for Greece, estimated to be worth 85 billion euros, or $120 billion. The ministers agreed to lighten the burden on debtor countries by reducing their interest rates and extending loan maturities, as well as helping them to buy back their bonds.

Still unresolved is the dispute over the extent to which creditors will have to sacrifice in a second bailout for Greece, and whether Europeans should include bond swaps in the rescue with the accompanying likelihood of it being declared a selective default by credit rating agencies. The European Central Bank opposes such an outcome, arguing that, by allowing the European bailout fund to finance buying back Greek bonds at market rates, private bondholders would be involved, as Germany wishes, but without a risk of default. France has said that any solution must be acceptable to the central bank.

“My bet is there will be some form of summit next week,” said a European official who was not authorized to speak publicly. “And it will go further toward the E.C.B model than to selective default — though there is everything to play for and it all depends on what Mrs. Merkel does.”

In its report on Greece, the I.M.F. highlighted the risk of default for the Greek banking sector, saying that having bondholders participate in any future bailouts “may well generate” a selective default rating for Greece, “although perhaps only for a short period of time.”

Adding to tension this week is anticipation about bank stress tests that will be released on Friday after stock markets close. The tests, which will examine banks’ ability to withstand economic and market shocks, could reinforce fears that many banks remain fragile.

In an indication that more banks may fail than did so last year, the Helaba Landesbank Hessen-Thüringen in Frankfurt conceded on Wednesday that its capital reserves would not meet the threshold to pass.

Helaba complained bitterly, however, that the European Banking Authority, which is conducting the tests, had refused to give the bank credit for state aid it had received, and said it would have passed otherwise.

According to Helaba, the banking agency said it did not have time to scrutinize whether the state aid qualified as core Tier 1 equity.

Germany’s landesbanks, typically owned by state and local governments and local savings institutions, are regarded as a weak spot in the nation’s otherwise powerful economy. They have been among the most vocal critics of the stress tests. All the landesbanks passed the tests last year, a result that contributed to skepticism that the exercise was strict enough.

Hans-Dieter Brenner, the chief executive of Helaba, said in a statement that the banking agency had “without reason pilloried a financial institution that is healthy to the core.” The agency declined to comment.

The I.M.F report released Wednesday on Greece also referred to one, unidentified, smaller bank whose capital fell “well short” of minimum requirements and was exploring the idea of a merger with its major shareholder.

Stephen Castle reported from Brussels and Jack Ewing from Frankfurt.

Article source: http://feeds.nytimes.com/click.phdo?i=5374f5b01cbedbb207fe6ca65206e65c

Stocks and Bonds: Europe’s Debt Problems Send Shares Lower

Oil rose $1.89, to $99.59 a barrel, after major banks raised their forecasts for crude prices. Goldman Sachs, JPMorgan and Morgan Stanley analysts predicted a rise in global demand would drive oil prices higher later this year. Goldman analysts said oil prices could reach $135 a barrel by the end of 2012.

Stocks swung between gains and losses throughout the day, with Chevron and other energy firms posting the largest gains.

The Dow Jones industrial average fell 25.05 points, or 0.20 percent, to 12,356.21. The Standard Poor’s 500-stock index dropped 1.09 points, or 0.08 percent, to 1,316.28. The Nasdaq composite index declined 12.74 points, or 0.46 percent, to 2,746.16.

Stocks had been lifted in the first four months of the year by stronger earnings reports, an improving job market and other signs of economic recovery. But all three major indexes have lost more than 3.5 percent this month, even as earnings remain strong. Widespread optimism has been offset by a host of concerns, especially the effect of higher oil prices on consumer spending and the risk that debt troubles in Europe could get worse.

Markets faced more troubling news about Europe on Tuesday, when Greece’s main opposition party said it opposed the government’s latest endeavors to reduce debt. The news further reduced hopes that the country might be able to repair its finances enough to get another loan package from the International Monetary Fund.

The ratings agency Moody’s also warned that a restructuring of Greece’s debt would be considered a default. That would cause borrowing costs for other debt-burdened European countries to soar.

Uri Landesman, president of the hedge fund manager Platinum Partners, said a Greek default could start a chain reaction affecting larger countries like Spain, wreaking havoc on the global economy. “If you had a Spanish default, there wouldn’t be a single world bank not affected,” Mr. Landesman said.

United States banks had $187 billion at stake in Spain as of the end of last September, according to the most recent data from the Bank for International Settlements. The amount includes holdings of government debt, derivative contracts and other commitments.

The Commerce Department reported that sales of new homes rose slightly in April, but at a rate far below what would be normal in a healthy housing market. New home sales rose to an annual rate of 323,000, from 300,000 in March.

The energy company El Paso rose 6.53 percent, to $20.22, after saying it planned to split itself into two publicly traded businesses by the end of this year.

AutoZone rose 6 percent, to $293.30, after the specialty retailer’s earnings jumped 12 percent on strong sales of its Duralast auto parts.

Medtronic fell 1 percent, to $40.88, after its earnings fell short of forecasts.

The Treasury’s 10-year note rose 4/32 to 100 3/32. The yield fell to 3.11 percent, from 3.13 percent late Monday.

Article source: http://feeds.nytimes.com/click.phdo?i=d7cf17d3cdc7200a487a74d3dbb4a9cf