New Report Finds Nonprofit Groups Are Borrowing Less

Uncertainty about the economy led many nonprofit organizations to borrow less money for capital improvements

during the past year, while fallout from the recent economic downturn has increased the possibility that more groups might have trouble paying their debts, says a report by Moody’s Investors Service, a credit-rating company in New York.

The 68 nonprofit organizations that Moody’s rates borrowed $1.5-billion for new projects in 2003, up from $805-million last year. But two groups accounted for more than two-thirds of the borrowing this year: The Howard Hughes Medical Institute, in Chevy Chase, Md., borrowed $500-million to build the Janelia Farm Research Campus, in Loudon County, Va.; and the J. Paul Getty Trust, in Los Angeles, took out a $525-million loan to refinance existing debt and make capital improvements. Removing those two groups from the total lowers the amount that nonprofit groups borrowed this year to $475-million.

Moody’s also assigned just four initial credit ratings in 2003, compared with 13 last year. The four newly rated groups borrowed $148-million this year; in 2002, the 13 newly rated organizations borrowed $430-million.

Slow Economy Cited

Moody’s attributes this year’s falloff in borrowing by the majority of nonprofit groups it rates to a slowdown in the economy that began in 2000 and lasted into 2003, and to an unusually large number of new borrowers in 2002, according to Roger Goodman, a Moody’s analyst who wrote the report.

The downturn in the economy caused many groups to defer plans to incur substantial debt, Mr. Goodman said. “Organizations used to borrow money to expand based on pledges from donors,” he said, “but now it seems like they might be waiting to receive cash before they begin a project.”

Moody’s also lowered the credit ratings of four nonprofit organizations this year: the National Wildlife Federation, in Washington; San Diego Natural History Museum; University Corporation for Atmospheric Research, in Boulder, Colo.; and Virginia Horse Center, in Lexington, Va.

Credit ratings gauge an organization’s ability to repay a loan. A strong credit rating generally makes it easier to borrow money, and can allow a borrower to negotiate an interest rate that is more favorable than for groups with lower ratings.

Moody’s expects many nonprofit organizations — especially groups that rely on investment income for a large percentage of their annual revenue — to face increasing credit pressures next year. Because many organizations use a three-year-average endowment-spending policy, the report says, fiscal 2003 and 2004 will be the first years affected by endowment declines that many groups experienced from early 2000 to late 2002.

Many groups also face continuing pressures from fund-raising declines and from cutbacks in government support, Mr. Goodman says, putting more pressure on their ability to pay their debts.

The report, “Not-for-Profit Institutions Retain Mixed Credit Outlook,” can be obtained free by sending an e-mail to higher.education@moodys.com. Copies also can be obtained by writing to Devika Ramdat, Moody’s Investors Service, 99 Church Street, New York, N.Y. 10007, or by calling (212) 553-1658.