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Moody’s Global

Special Comment

U.S. Public Finance October 2008

Table of Contents: Summary Opinion Short Term Fund Depositors Have More Liquidity Available Than Originally Projected Moody’s Assessment of Short Term Fund Depositors Conclusions from our Outreach Moody’s Related research: Appendix 1 Appendix 2

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2 2 3 3 4 9

Analyst Contacts: New York

1.212.553.0377

US Public Finance: John C. Nelson Team Managing Director Roger Goodman Vice President - Senior Analyst Kimberly S. Tuby Assistant Vice President - Analyst

Credit Policy Naomi Richman Chief Credit Officer – Global Project and Infrastructure Finance

Commonfund Short Term Fund Credit Impact: No Rating Downgrades Thus Far, but Weaker Liquidity Is Contributing to Rating Pressure for Some Universities Summary Opinion Moody’s is continuing its assessment of the closure of the Commonfund Short Term Fund on more than 260 rated colleges, universities and private K-12 schools. Our analysis is focused on the ability of these debt issuers to access alternate liquidity sources and avoid any delay in debt service payments. Thus far, we have found that the overwhelming majority are in satisfactory positions to continue making timely debt service payments and otherwise continue their operations with only minor budgetary or liquidity adjustments. To date we have not taken any rating actions on individual credits due solely to their level of Commonfund exposure. However, reduced liquidity has been a contributing factor to several watchlist and negative outlook rating actions taken in the past week. The appendices to this publication include lists of rated institutions which have exposure to the Fund. Appendix 1 identifies institutions which we assess as having a manageable level of exposure and where we do not anticipate any near term rating action due to the level of Commonfund exposure. Appendix 2 includes recent rating actions in which the level of Commonfund exposure was a contributing factor. Other rated institutions with money locked in the Fund are not listed in the appendix because we are still in the process of assessing the level of exposure and credit impact.

Special Comment

Moody’s U.S. Public Finance

Commonfund Short Term Fund Credit Impact:

Short Term Fund Depositors Have More Liquidity Available Than Originally Projected Much of the liquidity stress potentially caused by the closure of the Short Term Fund has been lessened by the allowance of more rapid redemptions of fund holdings over the last two weeks. In September, Moody’s reported that only 38% of fund holdings were expected to mature and be made available by October 31, 2008. However, the Commonfund and Wachovia, trustee of the Fund, have been able to sell assets at full value faster than expected, so that as of October 21, investors were able to redeem 48% of their original balances. Under the assumption of no new asset sales and new liquidity only provided by maturing securities sold at no loss, Commonfund management projects 50% of the Short Term Fund will be available by October 31, 2008 and 62% by December 31, 2008.

Moody’s Assessment of Short Term Fund Depositors Moody’s reached out to more than 260 rated institutions which we believe have funds locked up in the Commonfund Short Term Fund. As of October 21, 2008, we have received completed responses from 242 (91%) of those contacted. As we assess these responses and complete the outreach to the remaining fund depositors, we will take rating action if we believe there has been material weakening of liquidity and credit position. In addition, an institution’s unwillingness to fully respond and report Commonfund exposure and near term impact on liquidity could result in the rating being placed on watchlist for downgrade. Our initial outreach has focused on capturing the amount still locked in the funds, availability of other sources of immediate liquidity, timing and size of next debt service payments, and any management concerns about meeting debt service and other operating obligations. We have prioritized our follow-up to focus on rated institutions that: „

Are rated A3 and below which we believe have Commonfund exposure

„

Have exposures equal to 30% or more of their unrestricted financial resources

We have received responses from 97% of our A3 and below rated portfolio which we believe to have Commonfund exposure. Moody’s will continue to review the ratings and publish update reports on individual credits which have a meaningful amount of exposure to the Commonfund. Our analysis of responses is focusing on:

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„

Availability of other sources of liquidity, including other unrestricted cash and investments and bank operating lines of credit, and liquidation of longer-term investments into more liquid asset classes;

„

Diversification and asset allocation of alternate sources of liquidity, especially as recent investment performance has likely been very weak, depleting quasi-endowment balances and increasing capital calls from various privately managed funds;

„

Review of detailed multi-month cash flow forecasts through at least December (which tends to be a low point for cash for most higher education institutions prior to receipt of tuition in late December/early January) and review of all assumptions behind projections, with forecasts stressed to assume no further distributions from the Commonfund;

„

Management and board decisions about arranging additional access to liquidity and decision-making process for liquidating quasi-endowment funds;

„

Timing and size of debt service payments over the next year and interest rate assumptions on variable rate debt; and

„

Review of other claims on liquidity which could place pressure on an institution’s operations over the next year.

October 2008 „ Special Comment „ Moody’s U.S. Public Finance - Commonfund Short Term Fund Credit Impact:

Special Comment

Moody’s U.S. Public Finance

Commonfund Short Term Fund Credit Impact:

Conclusions from our Outreach Based on our communication with 242 issuers in the past three weeks, we believe the vast majority of colleges will successfully manage through liquidity challenges brought about by the Commonfund Short Term Fund closure, and we do not anticipate a large number of rating actions based solely on exposure to the Commonfund. However, in certain cases, rating actions may be taken due to pressure on liquidity in conjunction with other challenging credit factors, such as an inability or unwillingness to secure other sources of liquidity, history of weak operating performance, or high levels of variable rate debt. The ability to maintain smooth operations without disruption, despite such a significant event across the sector has largely been driven by: „

Conservative liquidity management resulting in most institutions holding cash balances in multiple accounts and sustaining healthy operating reserves;

„

The decision to draw on or establish bank operating lines of credit; despite the tight credit environment, most colleges are viewed as strong credits and appear to continue to have access to lines and have been able to implement new lines quickly;

„

Existence of unrestricted quasi-endowment funds, which although typically invested for the long-term, could temporarily serve as an operating cushion;

„

For institutions with largely fixed rate debt, the expected stability and predictability of near term operating expenses, with financial managers confident in their ability to forecast near-term cash flow and predict and plan for low points of cash balances.

The availability of quasi-endowment funds provides comfort that even if distributions from the Commonfund stall or if operating lines of credit are terminated by banks, colleges could have unrestricted financial resources to operate through low points in their cash balances. However, potential reliance on these longer-term investments for medium term liquidity heightens the importance of analysis of the quasi-endowments asset allocation. Certain alternative investments, including hedge funds, might not be able to provide colleges with timely liquidity should it be needed in a tight timeframe. Further, many colleges have chosen not to liquidate these quasi-endowment funds possibly to avoid realizing investment losses and instead have opted to rely on lines of credit during a period of reduced liquidity. While the decision to not disrupt long-term investment strategies may prove wise over the longer term, this choice does raise the risk profile for colleges that allow their cash and short-term funds to drop to very low levels. Over the next several weeks, Moody’s will complete its review of ratings of issuers with meaningful amounts of illiquid funds in the Commonfund Short Term Fund. We will publish individual reports on those credits as warranted.

Moody’s Related research: „

Commonfund Short Term Fund Closes – Moody's Assessing Impact on U.S. Colleges and Universities (111675)

„

No Rating Actions Taken from Moody's Review of Impact of Commonfund Short Term Fund Closure on Universities that Issue Self-Liquidity Debt (111754)

„

Impact of the Credit Crisis and A Weaker Economy on U.S. Higher Enducation (111958)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

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October 2008 „ Special Comment „ Moody’s U.S. Public Finance - Commonfund Short Term Fund Credit Impact:

Special Comment

Moody’s U.S. Public Finance

Commonfund Short Term Fund Credit Impact:

Appendix 1 Rated Issuers with Manageable Commonfund Exposure; No Near-term Rating Action Expected due to the Level of Commonfund Exposure (Commonfund exposure may include funds held by a related entity, such as a public university foundation)

4

Private College & Universities

Rating

Agnes Scott College

A1

Alma College

A3

American University

A2

Amherst College

Aaa

Babson College

A3

Bellarmine University

Baa2

Berea College

Aaa

Berklee College of Music

A2

Biola University

Baa1

Bowdoin College

Aa2

Brown University

Aa1

Bryant University

A2

Bryn Mawr College

Aa3

Bucknell University

Aa2

California Institute of Technology

Aaa

California Lutheran University

Baa1

Canisius College

Baa2

Carleton College

Aa2

Case Western Reserve University

A1

Catholic University of America

A2

Christian Brothers University

Baa3

Claremont Graduate University

A3

Claremont McKenna College

Aa1

Clarkson University

A3

Colgate University

Aa3

College of New Rochelle

Baa3

College of the Holy Cross

Aa3

Colorado College

Aa3

Columbia University

Aaa

Connecticut College

A2

Creighton University

A2

Culinary Institute of America

Baa2

Dartmouth College

Aaa

October 2008 „ Special Comment „ Moody’s U.S. Public Finance - Commonfund Short Term Fund Credit Impact:

Special Comment

Moody’s U.S. Public Finance

Commonfund Short Term Fund Credit Impact:

5

Private College & Universities

Rating

Delaware Valley College

Baa3

Denison University

Aa3

Drexel University

A2

Duquesne University of the Holy Spirit

A2

Earlham College

Aa3

Emory University

Aa2

Fairfield University

A3

Franklin W. Olin College of Engineering

A1

Furman University

A1

Georgetown University

A3

Golden Gate University

Baa3

Grinnell College

Aaa

Gustavus Adolphus College

A3

Hamilton College

Aa2

Hartwick College

Ba1

Harvard University

Aaa

Harvey Mudd College

A1

Haverford College

Aa2

Hofstra University

A3

Illinois Wesleyan University

A3

John Carroll University

A2

Kalamazoo College

A1

Keck Graduate Institute of Applied Sciences

Baa3

Kenyon College

A1

Lafayette College

Aa3

Lasell College

Ba1

Lawrence University

Baa1

Lebanese American University

Baa1

Lewis & Clark College

A3

Long Island University

Baa3

Loyola Marymount University

A2

Loyola University

A1

Macalester College

Aa3

Marquette University

A2

Massachusetts Institute of Technology

Aaa

Merrimack College

Baa3

Middlebury College

Aa2

Monmouth College

A3

Monmouth University

A3

Mount Holyoke College

Aa3

Muhlenberg College

A1

Northeastern University

A2

Northwestern University

Aaa

Oberlin College

Aa2

October 2008 „ Special Comment „ Moody’s U.S. Public Finance - Commonfund Short Term Fund Credit Impact:

Special Comment

Moody’s U.S. Public Finance

Commonfund Short Term Fund Credit Impact:

6

Private College & Universities

Rating

Occidental College

Aa3

Ohio Northern University

A2

Otis College of Art and Design

Baa3

Otterbein College

A3

Pace University*

Ba1**

Pepperdine University

Aa3

Philadelphia University

Baa2

Pitzer College

A3

Pratt Institute

A3

Providence College

A2

Quinnipiac University

A2

Regent University

Baa1

Rensselaer Polytechnic Institute

A2

Rhode Island School of Design

A1

Rider University

Baa1

Rochester Institute of Technology

A1

Rollins College

A1

Santa Clara University

A1

Scripps College

A1

Seton Hall University

A3

Siena College

A3

Skidmore College

A1

Smith College

Aa1

Southern California University of Health Sciences

Ba1

Southern Methodist University

Aa3

Spelman College

Aa3

Springfield College

Baa1

St. Edward's University

Baa2

St. Joseph's College

A3

St. Lawrence University

A2

St. Michael's College

A3

Stonehill College

A2

Susquehanna University

A2

Swarthmore College

Aaa

Texas Wesleyan University

Ba2

The New School

A2

Thomas Jefferson University

A1

Tufts University

Aa2

Tulane University

A2

University of Dayton

A2

University of Notre Dame

Aaa

University of Pennsylvania

Aa2

University of Redlands

A3

October 2008 „ Special Comment „ Moody’s U.S. Public Finance - Commonfund Short Term Fund Credit Impact:

Special Comment

Moody’s U.S. Public Finance

Commonfund Short Term Fund Credit Impact: Private College & Universities

Rating

University of Richmond

Aa1

University of Southern California

Aa1

University of St. Thomas

A2

University of the Sciences in Philadelphia

A3

University of Tulsa

A2

Valparaiso University

A2

Vanderbilt University

Aa2

Vassar College

Aa2

Villanova University

A2

Washington and Lee University

Aa2

Washington University

Aaa

Webster University

Baa1

Wellesley College

Aaa

Wheaton College, IL

Aa3

Wheaton College, MA

A2

Wittenberg University

Baa2

Worcester Polytechnic Institute

A1

Yale University

Aaa

Public Colleges and Universities

7

Rating

Auburn University

Aa3

Bowling Green State University

A2

College of New Jersey

A3

Illinois State University

A2

Kansas State University

Aa3

Lincoln University

A3

Miami University

A1

Michigan State University

Aa2

Ramapo College

A3

University of Akron

A2

University of Alabama - Birmingham

Aa3

University of Alabama – Huntsville

A1

University of Alabama – Tuscaloosa

Aa3

University of Georgia

Aa2

University of Idaho

A1

University of Louisville

Aa3

University of Michigan

Aaa

University of Minnesota

Aa2

University of Northern Iowa

A2

University of South Florida

Aa3

University System of New Hampshire

A1

October 2008 „ Special Comment „ Moody’s U.S. Public Finance - Commonfund Short Term Fund Credit Impact:

Special Comment

Moody’s U.S. Public Finance

Commonfund Short Term Fund Credit Impact: Private K-12 Schools

Rating

Albuquerque Academy

Aa3

Berwick Academy

Baa3

Blake School

A2

Breck School

A2

Brooks School

A2

Choate Rosemary Hall

Aa2

Cranbrook Educational Community

Aa3

Hill School

A1

Lawrenceville School

Aa3

Loomis Chaffee School

A2

Lycee Francais de New York

Baa1

Middlesex School

A1

Miss Porter's School

A1

Phillips Academy (Andover)

Aaa

Proctor Academy

Baa3

Rippowam-Cisqua School

Baa2

St. Andrew's School

Aa1

St. George's School

Aa3

St. John's School

Aa3

St. Mark's School

A1

St. Paul Academy and Summit School

A3

United Nations International School

Baa1

Woodberry Forest School

Aa1

*See recently published report on individual institution

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October 2008 „ Special Comment „ Moody’s U.S. Public Finance - Commonfund Short Term Fund Credit Impact:

Special Comment

Moody’s U.S. Public Finance

Commonfund Short Term Fund Credit Impact:

Appendix 2 Rated Issuers with Commonfund Exposure that has Contributed to Recent Rating Action Franklin Pierce University*

Ba3, on watchlist for downgrade

Simmons College*

A3, on watchlist for downgrade

Suffolk University*

Baa2, negative outlook

*See recently published report on individual institution

Report Number: 112039 Author

Production Associate

Kimberly S. Tuby

Sarah Warburton

© Copyright 2008, Moody’s Investors Service, Inc. and/or its licensors and affiliates (together, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

9

October 2008 „ Special Comment „ Moody’s U.S. Public Finance - Commonfund Short Term Fund Credit Impact:

Table of Contents

U.S. Public Finance. Moody's Global. Special Comment. Table of Contents: Summary Opinion. 1. Short Term Fund Depositors Have More. Liquidity Available Than Originally ..... Moody's Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody's Investors Service (MIS), also maintain policies and ...

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