Moody’s Cautiously Upbeat on Brexit Extension

A major credit rating agency says that a possible Brexit extension, which the British Parliament is considering, could be a plus for the UK.

There’s a lot of uncertainty as to whether the nation’s divorce from the European Union, slated for March 29, will be amicable or acrimonious. Moody’s Investors Service has dubbed the possibility of pushing the date back “credit positive” for the UK’s rating.

The firm said this reduces the “no-deal” possibility, which would create calamity for trading between Continental Europe and Britain. Moody’s said it thinks the UK and the EU will “eventually agree on a negotiated withdrawal.”

Certainly, Moody’s is not indicating a rating upgrade now. Following Britain’s June 2016 referendum vote to secede from the EU, all three major ratings agencies lowered the UK government’s bonds to the third notch down on the credit spectrum. In all three cases, the rating still is labeled high grade.

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The one difference among the trio of ratings providers is that Moody’s rates Britain “stable,” while Standard & Poor’s and Fitch have the nation on “negative watch.” This means that they could lower their ratings further and they have doubts about the sustainability of their current assessment.

At this stage, Prime Minister Theresa May faces a series of parliamentary votes on the Brexit question. The first will be on a UK withdrawal revision, where, if May’s proposal is declined, a “no-deal” vote will occur the next day. If that doesn’t work out, the legislature will vote on a “short limited extension” to Article 50 from the EU, which enables the withdrawal. This would again stall Brexit. May has said she’d push it to June, adding that it would be “extremely difficult” to have it go further.

Parliament passed a rule that binds May to the schedule, as she’s changed voting dates at the last minute before.

Other leaders, such as Junior Justice Minister Rory Stewart and Irish Prime Minister Leo Varadkar, have said that delay is more likely.

“I think we would have to be forced into an extension of Article 50,” Stewart said in an interview with Sky News on Sunday. “There doesn’t seem to be parliamentary majority for ‘no deal.'”

Varadkar has told Cabinet colleagues he is expecting the terms to stall until June, according to Ireland’s Sunday Independent.

“At the moment, we do not think that the potential delay of the exit date provides any clear indication of what the final outcome of the Brexit process will be,” said Moody’s. “Such a delay also prolongs the state of elevated uncertainty for affected UK issuers, which weighs on their immediate business and credit prospects.”

If the extension option flies, the credit organization is concerned about how the EU will respond.

Like Stewart and Varadkar, Moody’s also sees this as a problem, but said it’s possible that there could be “unclear” conditions attached to the halt. If the European Council wants to extend a decision point to a date other than what Britain has proposed, that could end up making an agreement even tougher, the agency said.

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Tags: Brexit, Moody's, Theresa May, UK

Private school endowments in the US returned 7.4% on assets for fiscal year 2018, down from 11.8% the previous year, according to a study from Commonfund, an asset manager for non-profit organizations.

The annual study of independent school endowment management practices was conducted by Commonfund in conjunction with the National Business Officers Association. A total of 223 schools representing approximately $12 billion in combined endowment assets provided data for the study.

The participating institutions are comprised of day schools, boarding schools, and schools that are a combination of the two. The schools are private, nonprofit institutions enrolling students from kindergarten through 12th grade. Approximately 10% of the student population in the US attends an independent school, according to the National Association of Independent Schools.

This year’s study found that trailing 10-year returns rose to an average of 5.5% net of fees from 5.2% the previous year. Meanwhile trailing five-year returns declined to an average of 7.3% from 7.9%, and average three-year returns rose to 6.2% from 4.4% a year ago.

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“Just like we see with colleges and universities, independent schools are facing rising costs and limits on their ability to raise tuition,” said Cathleen Rittereiser, executive director of the Commonfund Institute. “Raising non-tuition sources of revenue is an imperative, maximizing the returns of their endowments is an important part of that strategy.”

Data gathered in the study was segmented into three size groups: institutions with endowment assets of more than $50 million; those with assets between $10 million and $50 million; and those with less than $10 million in assets.

The results from the study indicate that size matters for these endowments as the larger ones on average outperformed the smaller ones. Schools with assets over $50 million reported an average return of 8.2% in 2018, while those with assets between $10 million and $50 million reported a return of 7.4%, and those with less than $10 million in assets reported a 6.2% return.

Schools with assets over $50 million also reported the highest return for the three, five-, and 10-year time periods. Over the past 10 years, the largest schools reported an average return of 6.3%, while institutions with assets between $10 million and $50 million reported an average return of 5.5%, and those with assets under $10 million saw a 4.4% average return.

The asset allocations for private school endowments stayed relatively unchanged during fiscal year 2018, according to the study. Participating institutions reported having an average of 33% of their endowments invested in alternative strategies, down from 35% in 2017; 28% in US equities, down from 27% in 2017; 22% in non-US equities, up from 20% in 2017; 13% in fixed income, which is unchanged from the previous year; and 4% in short-term securities, cash, or “other,” down from 5% in 2017.

Within the 33% allocated to alternative strategies, marketable alternative strategies accounted for the largest sub-allocation, at 18%, followed by private equity, which accounted for 6%. Energy and natural resources accounted for a 3% allocation, and venture capital and private equity real estate (noncampus) were at 2% each, while commodities and managed futures and distressed debt accounted for 1% each.

Tags: Commonfund, Endowments, National Business Officers Association, Returns