College Takes on Millions in Additional Debt
The College received a $41-million loan last Thursday from the Ohio Higher Educational Facility Commission, a governmental group that issues revenue bonds to colleges and universities. A significant portion of this money will be used to pay for the Philips gym expansions, the renovation of Carr Pool, an addition to Hall Auditorium and other building renovations on campus.
According to outgoing Vice President for Finance and Administration Mike Frandsen, the College will take on $25.3 million in additional debt. This brings the College’s overall debt to about $228,908,000 for this fiscal year, according to a report by Moody’s Investors Service.
Moody’s — a financial research company that ranks the creditworthiness of borrowers and measures the risk to investors — has assigned the College an Aa3 credit rating. Moody’s website states that credit scores “provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged.”
An Aa3 rating is considered “high quality and very low credit risk” and is the fourth highest rating available.
Moody’s justified the rating in their report by citing the College’s “sizeable wealth with sound financial flexibility, solid reputation as a selective liberal arts college and very strong fundraising,” referencing President Krislov’s impressive Illuminate campaign, which collected $317.85 million between 2012 and 2016.
The College will use the $25 million in bond revenue to fund its capital projects and the rest of the $41 million loan to pay off its 2009 series bonds. The College is projected to have the bonds repaid by 2048.
Frandsen, who is scheduled to leave Oberlin at the end of the year to become the president of Wittenberg University, explained the administrative procedures that led to the bonds, which included discussion with the Board of Trustees.
“Any bond issuance by the College requires the approval of the Board of Trustees,” he said. “Various board committees reviewed the transaction as part of the process. My office made a recommendation to the board for consideration and handled the execution based on the board’s direction.”
Despite the positive rating, Moody’s did note that enrollment had decreased this year to 2,894 students and that “there was a dip in freshmen retention below 90% and a significantly increased freshmen discount rate for the incoming class.”
This presented a possible risk to the credit rating as the report states that the College is highly reliant on student tuition as a source of revenue.
The report cited the importance of increasing revenue from other sources and keeping expenses low as the solution to this problem.
“Given management’s indication of more moderate net tuition revenue growth, increasing revenue from other sources or more aggressively containing expenses will be critical to carry out its plan to improve operations,” the report stated.
Moody’s report also referenced the high-cost operating model that the College employs, particularly in the Conservatory, and stated that this model would “continue to pressure its ability to balance operations.”
The College had unusually high expenses this year, according to the report, resulting in a drop in cash flow. The $8.4 million Voluntary Separation Incentive Program — the faculty buyout plan initiated in May last year — largely caused the spike in expenses, according to the report.
Bond issuances are fairly common among universities and colleges, but the Aa3 rating stands out among the College’s neighboring institutions, who tend to have much less favorable ratings. Kenyon College, The College of Wooster, Xavier University and Case Western University all received A1 ratings, which are characterized as “upper-medium grade and low credit risk.” Wittenberg University received a B1 grade, which is characterized as “not prime” and a “speculative and a high credit risk.”
Frandsen was unavailable for comment on how the debt created by the new bond issuance could affect potential budget cuts.