Reed College’s rating agency report for 2019, issued by Standard and Poor’s, suggests that Reed’s strong bond rating, which determines the financial security and cost of Reed’s bonds, depends on Reed’s relationship with Wells Fargo.
Rating agency reports, issued by the main rating agencies Standard and Poor’s or Moody’s, issue bond ratings for institutions based on that institution’s financial history and record of payments. Similar to an individual’s credit rating, these bond ratings determine the interest rate for a given institution’s bonds.
Reed uses bonds to pay for new investments that the endowment cannot cover, such as the Performing Arts Building (PAB) or new residence halls like the Grove and Trillium. Investors buy Reed’s bonds, which are attractive to investors because of Reed’s high bond rating, and Reed uses the money from these sales to fund the construction. Then, over time, Reed pays back these bonds at the interest rate determined by their bond rating.
Standard and Poor’s ratings range from AAA to D. In 2019, S&P issued Reed a long term rating of ‘AA-’ (stable) and a short term rating of ‘A-1.’ According to S&P, “A short-term obligation rated ‘A-1’ is rated in the highest category by S&P Global Ratings. The obligor’s capacity to meet its financial commitments on the obligation is strong.”
According to the S&P report on Reed, this high short term rating “reflects a standby bond purchase agreement (SBPA) provided by Wells Fargo Bank N.A.” The SBPA supports both the 2008A variable-rate debt which funded the construction of the Grove and the 2017A fixed-rate debt, in which Reed combined the bonds for the PAB and Trillium.
The SBPA is set to expire in January 2023, five years after Reed and Wells Fargo finalized it. According to a press release from the rating agency Moody’s on January 30, 2018, “Moody’s has, at the request of Reed College (the College), reviewed the short-term rating of the Bonds in conjunction with the delivery of an amended and restated standby bond purchase agreement (SBPA or liquidity facility) provided by Wells Fargo Bank, N.A. (the Bank). The delivery of the amended and restated SBPA is currently scheduled to be effective January 31, 2018.”
The fact that Reed requested that the rating agency review the “amended and restated” SBPA suggests that this agreement with Wells Fargo factored into the positive rating Reed received, or at least that Reed believed the agreement would strengthen their case for a higher rating.
The timeline of this agreement means that the negotiations to reach the new SBPA with Wells Fargo at least partially took place during the two month Reedies Against Racism occupation of Eliot Hall. The SBPA, which S&P factored into both their long and short term rating, went into effect shortly following the Board of Trustees’ decision to reject the students’ demand that Reed cut ties with Wells Fargo.
The S&P report also explained that the strengths which yielded a high short term rating were offset by Reed’s “relatively weak and still deteriorating” matriculation rate over the past several years, identifying this weakness as a possible criterion for a rating downgrade. Matriculation rate describes the number of admitted students who choose to attend Reed. The freshman matriculation rate in 2012 was 30.7%, according to the S&P report from 2015. By Fall 2018, the matriculation rate had fallen to 17.4%.
Reed explains this decline as a result of attracting higher quality students who are receiving more competitive offers from similarly selective institutions. The 2019 report states, “Management attributes this decreasing matriculation rate to a shift in the quality of students it attracts and the competing institutions to which they apply.”
Reed’s admissions statistics tell a different story. In 2012–2013, when the matriculation rate was at 30.7%, the 75th percentile of SAT scores for the admitted class was 770 and the 25th percentile was 670. In 2017–2018, when the matriculation rate had fallen to 20.5%, the 75th percentile of scores was 740 and the 25th percentile was 670. The percentage of students in the 2017–2018 class with high school GPAs of 3.75 or higher was 70%. In 2012–2013, the percentage was 72.19%.
As Reed’s matriculation has fallen, quantitative measures of admitted students’ success have plateaued. This plateau puts Reed at risk for a rating downgrade according to rating agency metrics. Nevertheless, after amending its bond contract with Wells Fargo, Reed received the highest short term rating possible, ‘A-1.’
The reports from S&P and Moody’s are available to the public at: https://www.reed.edu/vice-president-treasurer/reports.html. More about their rating system can be found at: https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352. Moody’s press release is at: https://www.moodys.com/research/Moodys-affirms-VMIG-1-on-Oregon-Facilities-Authority-Revenue-Bonds–PR_904450804. Reed admission statistics can be found at: https://www.reed.edu/ir/cds/cdsindex.html.