Moody's Investors Service will explore new, defined liquidity measures with an eye to making them part of its standard set of metrics for rating healthcare, higher education and other not-for-profit institutions.
The ratings firm wants to assist investors in distinguishing among organizations and boost comparability between organizations in its rating analysis.
"Universities and hospitals generally disclose little or no information regarding the true liquidity of their cash and investments reported in their audited financial statements," said Moody's Vice President Roger Goodman. "Reported data on cash and investments lack sufficient and useful analytical content without additional information to supplement financial reporting requirements."
For example, he said, there is frequently little discussion by these institutions of the limits on the sale or redemption of investments, or of the allocation by manager.
"In the current stressed environment, where many organizations are facing the largest investment losses since the 1970s or earlier, clear and comparable information on liquidity is more critical than ever in determining credit risks and quality," said Goodman. "As we have said before, universities in particular have pursued increasingly complex investment strategies with large implications for management and oversight needs."
Goodman said Moody’s has concluded that these strategies have introduced new liquidity risks that are impacting many organizations, especially given the strains now present.
"While we already have access to substantially more supplemental information on liquidity obtained from rated universities and hospitals and we incorporate these data into our analysis and ratings, the lack of consistency in reporting and presentation makes comparisons challenging," said Goodman. "In the current stressed liquidity environment, we believe significant differences in liquidity exist between organizations that are not readily apparent from publicly available information."
For both the higher education and healthcare sectors, he said, Moody's ratios will need to address uncertainty of investment liquidity by asset class and manager type. In particular, analysts will likely exclude hedge funds that promise liquidity within a certain time period, but have the ability to implement "gates" to limit withdrawals in some circumstances.
"A likely result of our analysis will be the development of multiple measures that both include and exclude certain investments that are subject to gates or other types of uncertainty, including valuation delays or opacity," said Goodman.