Rating agencies affirm Liberty's strength as bond refinance succeeds
The dynamic nature of decision-making within Liberty University’s business model was illustrated over the last eight weeks. In that short timeframe, the university garnered a re-affirmation by two top credit ratings agencies and successfully refinanced preexisting bond debt with a new bond offering, saving millions of dollars for the school.
“With targeted negotiation guidance from the Executive Committee of the Liberty University Board of Trustees, we were able to harness our Finance and Legal teams to make quick decisions and capture a lower interest rate for significant long-term savings,” said Rob Ritz, Liberty’s Chief Financial Officer. “On the day of the actual $100 million offer, President Jerry Falwell and our staff worked the phones to negotiate and quickly get decisions that were needed for a successful offering.”
On Nov. 7, Moody’s Investor Service issued a credit opinion affirming Liberty’s previous “Aa3” high quality low credit risk rating. Moody’s stated that Liberty maintained strong revenue growth and “uncommonly good operating performance,” which has “fueled gains in Liberty’s total wealth.”
Operating performance, when combined with robust capital investment and very little debt, illustrates that Liberty is in a position to continue to grow its endowment “almost entirely free from donor restriction,” according to Moody’s.
The following day, Standard and Poors (S&P) released its “Ratings Direct” Primary Credit Analysis report on Liberty. S&P affirmed its prior long-term rating for Liberty University as “AA/Stable.” S&P specifically cited Liberty’s history of net adjusted operating performance and margin by describing it as “robust” in recent years and remaining favorable for FY20 as well. Ken Rodgers, of S&P’s New York Office, said “We also assessed Liberty’s financial profile as very strong, characterized by its excellent financial operating performance, healthy endowment, very favorable expendable resources, and below-average debt level.”
Challenges for the future cited by both agencies include the need to diversify revenue in general and to continue to excel in an increasingly competitive market.
Multiple times, the large size of the unrestricted portion of the endowment and Liberty’s general liquidity combined to place Liberty in an impressive strategic position that most colleges and universities do not hold.
The large unrestricted portion of the Liberty endowment places the university in the top 20 private institutions as ranked by U.S. News and World Report. Liberty’s total FY18 unrestricted dollars ranked higher than schools like Cornell, Tufts, Dartmouth, John Hopkins, Brown, Wake Forest and Georgetown.
Throughout the months of October and November, Liberty worked with multiple firms to pursue a refinancing of the Series 2010 bond originally connected to the Virginia College Building Authority. Staff worked closely with the Williams Mullen Law Firm, the Bank of New York Mellon Trust Company, McGuire Woods LLP, Davenport and Company LLC, Morgan Stanley Fixed Income Division and Liberty’s audit firm BDO.
This resulted in a successful refinancing of the Series 2010 bond to Liberty’s financial benefit.
The “Series 2010” bond, which had a 5.00% interest cost (average coupon rate) was replaced by a “Series 2019” bond reaching full maturity over a shorter timeframe at 15 years (March of 2034), with an All-In True Interest Cost of 3.42% (or 3.30% average coupon rate). “In short, Liberty’s financial strength helped us negotiate an even better arrangement for the future on the Series 2019,” Ritz said.
Compared to the “Series 2010” arrangement, the cumulative impact of the lower interest rate the university was able secure in the “Series 2019” refinancing arrangement will save the university over $28 million in interest costs.
Liberty’s Board of Trustees remained actively involved in the process, including members of the investment committee.