December 12, 2002 | Read Time: 3 minutes
A sharp increase in the number and types of nonprofit groups that are borrowing money, combined with the
poor economy and tough fund-raising environment, have increased the possibility that more organizations might soon have trouble paying their debts, according to a new report by Moody’s Investors Service, a credit-rating company in New York.
In the past year, the number of charities and foundations that borrowed money rose 25 percent, said Susan Fitzgerald, a senior vice president for Moody’s who wrote the report.
Nonprofit organizations rated by Moody’s now owe banks and other lenders a total of about $6-billion, the report says. Moody’s expects the borrowing trend to continue because of low interest rates and lenders’ growing familiarity with the financial needs of nonprofit organizations.
Companies such as Moody’s use credit ratings to gauge an organization’s ability to repay a loan. The strength of the rating reflects the expected ability of a borrower to pay off its debts on schedule and maintain long-term financial health. 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 credit ratings.
Among the groups that could experience declines in their credit ratings, the report says, are those that rely heavily on donations.
To determine its ratings, Moody’s analyzed five years of financial information from each nonprofit organization and met with senior managers from each group.
Moody’s gave a rating of Aaa, Aa, or A to nonprofit organizations that it felt had the most stable sources of revenue and therefore posed the smallest risk to lenders, with Aaa being the most favorable. It gave a Baa rating to organizations that had more potential volatility in their revenue sources than did highly stable groups. A rating of Aa1 indicates a stronger likelihood to repay a loan than a rating of Aa2 or Aa3.
All but 11 of the 64 nonprofit organizations rated by Moody’s received at least an A3 rating. That means that most charities that have borrowed money without the use of letters of credit from banks or other financial backing from third parties have maintained a high credit rating this year, Ms. Fitzgerald said.
“Institutions with a Baa rating might be a little more vulnerable,” she observed, “but we feel they still have the financial health to pay back their loans over 30 years.”
Having a strong credit rating makes a “powerful statement” in terms of fund raising, said James A. Gara, chief operating officer of the Museum of Modern Art, in New York, which has borrowed $250-million to help finance a renovation and expansion project.
“I couldn’t say we’ve received X grant or Y grant because of our A1 rating, but it gives outside validity to our financial statements.”
More Borrowing
The economic downturn might be encouraging more borrowing, as some charitable organizations continue to expand during tough times despite the decline in private donations, Ms. Fitzgerald said.
As the economy continues to sputter, volatility in the stock market threatens all charitable groups, the report says. In 2001, Moody’s-rated nonprofit organizations posted a median loss of 6 percent on their investments, the report says, meaning that half of the groups lost more and half lost less or earned money.
Moody’s says charities that depend heavily on investment income to pay for operations could see their credit ratings decline in the next year.
Professional and service organizations, many of which have diverse sources of revenue and large endowments and otherwise would not be affected by a market downturn, could face declining credit ratings if government grants continue to dwindle, the report says.
The report, “Not-for-Profit Institutions Have Mixed Credit Outlook,” is available 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.
