Improved Bond Ratings Indicate Financial Stability in Nonprofit World

Bolstered by an improving economy, the financial outlook for nonprofit organizations has improved, according to a new report by Moody’s Investors Service.

In 2005, Moody’s elevated the bond ratings for three of the 85 nonprofit groups it evaluates, while not downgrading any. That contrasts with its actions in the prior two years, during which the rating company downgraded seven nonprofit groups and upgraded one.

Bond ratings determine how much interest organizations have to pay when they borrow money or issue bonds. Those with a higher rating pay less interest.

The improved ratings show the nonprofit world has stabilized financially following a bad period during 2001 and 2002, when the stock market and other investments declined sharply, Moody’s says. Many nonprofit groups continued to see the effects of that downturn into 2004, according to the report, because of the continuing impact of investment losses they sustained in the previous years.

Overall, however, the report says that nonprofit managers have done a good job of dealing with difficult economic times.

“Many not-for-profit organizations have demonstrated an impressive ability to manage themselves well during a particularly stressful period and have been able to rebuild their financial positions back to earlier levels or even stronger,” the report says. “These organizations remain vulnerable to a potential future economic downturn, but we believe that the sector maintains a fundamentally healthy financial position, as a result of management responding rapidly and strategically to a changing environment during the past few years.”

More Groups Participating

Some challenges remain, however, Moody’s says. Cultural institutions such as museums, zoos, and performing-arts centers have substantially increased the amount of debt they are carrying as they attempt to maintain and improve their facilities, the report states. Large research organizations have come to rely more heavily on their investments because federal research grants that used to support their work have been cut.

The company says its portfolio of nonprofit groups seeking bond ratings so they can borrow funds has been growing for the past several years. This year Moody’s has issued bond ratings for five new nonprofit organizations.

The company expects that increasing numbers of nonprofit organizations “will borrow to invest in their facilities and to remain competitive.” The 85 groups that have received ratings have more than $7.4-billion in outstanding debts.

Reprints of the report, “Not-for-Profit Medians and Outlook 2005-2006,” can be obtained by calling Moody’s at (212) 553-1658, and asking for report number 94874.