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Outlook For U.S. Independent Schools Is Stable; Medians Demonstrate Resiliency Despite The Pandemic


Outlook For U.S. Independent Schools: Healthy Demand Trends Drive Steady Sector Performance


Table Of Contents: S&P Global Ratings Credit Rating Models


U.S. Not-For-Profit Health Care Rating Actions, January 2024


Migrants And Asylum Seekers Pose Budgetary Challenges In New York City, Chicago, And Denver

Outlook For U.S. Independent Schools Is Stable; Medians Demonstrate Resiliency Despite The Pandemic


Our rated universe includes some of the most prestigious and well-established independent schools in the country. These schools have remained largely resilient to the headwinds presented by the COVID-19 pandemic, with steady demand and enrollment trends, improving operations, and balance sheet growth. Management teams demonstrated the ability to adapt swiftly, as implementing health and safety measures became the top priority, providing significant risk mitigation as first delta and then omicron variants spread across the country. We expect this will support steady credit quality in 2022. Over the longer term, we expect to monitor discussions around affordability and expense pressures as broader population and demographic shifts emerge, and the kindergarten-to-12th-grade (K-12) market becomes increasingly competitive, with many high-quality providers. The questions below highlight what we believe will be the main drivers for credit quality this year and beyond.

Chart 1


Questions That Matter

1. Why is our sector view stable for 2022?

Following a year that saw a mix of in-person and hybrid options, intentional lowering of enrollment for health and safety reasons, or pressures within certain segments of the student body due to travel or other restrictions, all of our rated independent schools returned to full in-person learning in fall 2021. This led to a rebound in boarding and international students, and enrollment trends overall, translating into improved tuition and auxiliary revenues expected for fiscal 2022. Despite notable pandemic-related costs, general enrollment stability is supporting improved operations, bolstered by unprecedented market returns and continued fundraising strength. Given these trends, most schools entered 2022 with greater financial flexibility.

Chart 2


What we think and why

We expect steady enrollments and demand  Although the pandemic and recent variants continue to pose some uncertainty, robust measures around health and safety, testing, and campus vaccination efforts will likely support steady profiles for boarding and day schools alike. International students have largely returned to on-campus learning and the shifts in student composition between boarding, day, and remote learning which occurred last year have mostly normalized. We expect steady demand will support stable enrollment profiles. However, lower-rated schools with less demand flexibility will likely continue uneven enrollment growth compared with that of higher-rated and larger schools.

We anticipate moderate tuition increases and steady financial aid.  Due to the pandemic and shifts in modes of learning, many schools held tuition fairly flat for the 2020-2021 school year and increased financial aid offerings to students. With a return to in-person learning, most schools have raised tuition and returned discounting to pre-pandemic levels. We believe that future tuition increases and steady financial aid will provide additional financial flexibility as schools manage growing expense pressures.

Record investment gains provide flexibility.  Market performance in fiscal 2021 generated outstanding investment returns that exceeded anything we have seen in recent years, lending to growth in endowments and balance sheets. Although one year of growth or decline does not make a trend, we believe that the meaningful growth in fiscal 2021 provides meaningful flexibility. Fundraising and annual giving, similarly, remains strong and we anticipate further growth in resources over the next year. We will be watching to see how schools manage these resources relative to investment strategies, capital spending, and future debt issuance.

Some recession-driven pressures remain.  Inflation challenges, supply chain bottlenecks, staffing shortages, and volatile markets reacting to pandemic swings could present pressures. However, strong reserves, conservative budgeting practices, and proactive planning will allow for stability in the face of the continuing economic uncertainties.

2. What longer-term trends are we watching for the independent school sector and credit quality?

COVID-19 has been a great disruptor with wide-ranging implications, and has disproportionately affected low-income communities and populations of color. With many schools committed to enrolling a qualified and diverse student body, the pandemic could place a greater burden on these missions due to long-term financial considerations. As conversations around affordability continue, management teams will need to consider how schools can effectively deliver on their programming and values while balancing increased costs and the competitive landscape.

Chart 3

What we think and why

Demographic and migration trends affect regional demand factors.  Shifting demographics, most notably in the Northeast and Midwest, coupled with falling population growth rates, are starting to have an effect. These trends appear to have been exacerbated by the pandemic and we believe this could affect student demand, given that most of the schools we rate are in regions experiencing some demographic declines. We expect that boarding schools with a broader enrollment draw or schools with higher selectivity will largely be insulated from this impact. However, day schools drawing from a more regional population base could be more vulnerable to weakening trends. Although these factors might not translate into near-term enrollment shifts, we could see effects surface initially through weaker matriculation and selectivity metrics at certain schools.

The value proposition will continue to inform enrollment decisions.  As tuition levels continue to rise and schools remain focused on serving a socioeconomically diverse student body, we expect greater demands on institutional financial aid and support. In addition, increased competition from lower-cost and high-quality alternatives mean independent schools will need to continue demonstrating value in a shifting K-12 and higher education landscape. If independent schools face difficulties delivering on this value proposition, it could require shifts in program or mission over time to sustain demand.

Fundraising initiatives and capital campaigns will likely make a resurgence.  During fiscal 2021, schools were more cautious in attempting new large fundraising initiatives or donor campaigns, given the many economic considerations brought on by the pandemic. Instead, we saw continued donor participation through annual giving and expect increased momentum around fundraising during the next year. As more discussions around long-term financial and capital planning incorporate pricing and affordability considerations, calls to diversify revenues beyond tuition and fees will contribute to enhanced efforts in this area.

Fully remote offerings are not here to stay.  Independent schools will likely need to maintain some program flexibility, but the value provided by in-person learning and being part of the student community cannot be fully replicated in a virtual setting. Some schools have explored the possibility of offering supplemental virtual options, potentially for summer school or prior to a new student enrolling, which could enhance brand awareness and reach a wider demographic. Given the evolving landscape of education, we believe schools need to be ready to innovate to sustain enrollment and demand.

3. How will environmental, social, and governance (ESG) considerations affect the sector?

We believe that independent schools are exposed to a range of ESG risks. In our view, ESG credit factors are those that are visible and materially influence the creditworthiness of a rated entity or issue in a credit rating analysis. Therefore, preventing and mitigating ESG-related events is instrumental in maintaining credit quality. As risks such as cyber, legal, and health and safety intensify and events increase in frequency, we anticipate that management teams will strive to reduce their impact on demand and operations. Beyond our analysis, ESG factors are an increasingly important component of schools' investment practices, hiring decisions, and long-term planning considerations.

What we think and why

Event risks require proactive engagement to mitigate impact.  Many schools have established policies to address ESG considerations. At the same time, discussions around cyber security, cases of sexual misconduct, school safety, and diversity, equity, and inclusion (DEI), among other event risks, remain part of the overall landscape affecting independent schools. Recent events have cemented the relevance of proactively engaging in risk mitigation and prevention strategies, through governance practices, strategic financial investments, and adaptive planning.

Continuing progress toward access and DEI.  We expect schools will continue efforts to promote inclusivity and diversity across many areas of their operations. Over the past few years, several schools have hired DEI officers, and are working to increase the diversity of faculty, staff, board members, and students. In addition, we have seen efforts across all of our rated independent schools to attract students from diverse socioeconomic backgrounds. These efforts will come at a price, however, and management teams will have to consider these costs in planning. We anticipate that schools with more endowment and fundraising resources will be more effective in diversifying this base over the next year based on their ability to offer more financial aid resources.

Long-term financial planning is key.  Rising inflation, an increasingly competitive labor market, and teacher shortages will spur higher personnel costs for schools to maintain staffing needs. To combat expenditure growth, schools will need to increase revenue diversity outside of tuition revenues in order to maintain demand metrics through affordability, such as relying on greater annual giving and seeking improved investment yields. We also anticipate schools will need to adjust long-term financial planning, including tightening expenditure assumptions and increasing reliance on revenue growth outside of annual tuition rate increases.

Rating Performance

As of Jan. 31, 2022, S&P Global Ratings maintained public ratings on 40 independent schools, ranging from 'AAA' to 'BBB-'. Most of our ratings (83%) are in the 'A' category or higher and the rest are in the 'BBB' category. All but one of our independent school ratings carry a stable outlook; one rating has a negative outlook due to enrollment challenges and financial pressures. We do not have any ratings on a positive outlook.

During 2021, we added three new ratings, at the 'A', 'AA-', and 'AAA' levels. There were no rating changes in 2021; however, we revised the outlook to stable from negative on our ratings on Vail Mountain School in Colorado and Chapin School in New York. This reflects the same trends supporting our stable sector view, with improving operating trends and endowment growth.

Chart 4


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Chart 7


Fiscal 2021 Medians By Rating Category

Medians generally improved by rating category over the past year, although there is some inherent noise in the measures due to the small sample size and changes in the rated universe.

Outside of overall enrollment, which varies in range across rating levels, all other medians generally seem to trend according to rating category. Although freshman selectivity and matriculation rates are strongest for 'AAA' rated issuers, the total headcount is lower compared with some of the other rating categories. As expected, the 'AAA' rated schools, which hold significant endowments and garner healthy fundraising support, have the greatest revenue diversity with the least dependence on tuition, and greater support from investment and endowment income, as well as private gifts. On the other end of the rating scale, the 'BBB' category schools reflect the greatest dependence on tuition income, with the least support from endowment and fundraising. Also, tuition discount rates are usually higher for the 'AAA' rated schools compared with the other categories because these schools have larger reserves to cater to higher discounting needs.

Many of the other key financial ratios track according to rating category, including endowment market values and financial resource ratios. Since the overall investment market improved significantly in 2021, endowment market values across all rating categories have risen. In addition, although higher-rated schools tend to have more debt outstanding, their operating budgets also tend to be larger, reflecting maximum annual debt service burdens that are manageable overall across the rating categories. Also, capital expenses tend to be greater at higher rating levels, likely reflecting the availability of resources to support such needs, as well as campuses that demand such investment.

Table 1

Fiscal 2021 Medians For U.S. Independent Schools
Rating category AAA AA A BBB
Sample size 5 12 16 7
Total headcount 650 521 712 697
Freshman selectivity rate (%) 15.5 21.5 40.5 57.5
Freshman matriculation rate (%) 71.2 65.9 65.4 55.2
Revenue diversity
Tuition dependence (%) 49.4 63.5 72.6 77.8
Investment & endowment income (%) 25.9 19.2 7.6 2.5
Private gifts (%) 10.8 7.2 8.7 2.7
Financial aid and expense ratios
Tuition discount rate (%) 31.2 25.5 23.2 19.9
Financial aid burden (%) 16.4 14.2 16.1 16.6
Instruction (%) 27.9 43.4 42.3 53.7
Endowment market values ($000s) 863,553 212,212 100,541 51,927
Total debt outstanding ($000s) 68,546 40,700 26,904 27,170
Contingent liability ($000s) 59,910 17,100 17,160 27,737
MADS burden (%) 4.07 6.78 5.08 4.15
Average age of plant (years) 12.8 14.3 15.1 14.3
Annual capital expenses ($000s) 5,619 4,559 2,210 2,539
Financial resources
Cash and investments to operations (%) 1,096.2 555.8 298.7 159.2
Cash and investments to debt (%) 1,329.0 732.2 516.3 314.1
Expendable resources to operations (%) 846.4 391.1 185.4 91.7
Expendable resources to debt (%) 1,026.2 448.2 267.8 143.3
Net operating income (%) 0.2 4.3 3.7 7.0
Per student ratios
Net tuition revenue per student ($) 42,185 39,680 30,228 27,356
Total adjusted operating revenue ($) 123,614 84,995 58,989 44,911
Total adjusted operating expenses ($) 127,450 80,727 56,280 40,796
Total debt outstanding ($) 105,455 80,284 30,564 32,745
Expendable resources ($) 1,016,409 334,125 82,926 46,679
Endowment market value ($) 1,328,543 495,042 111,661 48,939

Sectorwide Medians

Overall, our sectorwide medians reflect stability over the past three years. Median headcount declined slightly in the 2020-2021 school year due to some of the pandemic pressures described earlier, while other demand metrics held fairly steady, with only minimal shifts from year to year.

Generally, fiscal 2021 was a favorable year financially. Despite impacts on tuition and auxiliary revenues as well as significant pandemic-related expenses, many schools entered the year with conservative budgets and worst-case assumptions. About 25% of the schools rated by S&P Global Ratings took out PPP loans and the related loan forgiveness provided flexibility for certain schools. Bolstered by robust market returns, our financial resource ratio medians improved notably. Fiscal 2021 cash and investments as a percentage of operations ratio increased by more than 36% compared with fiscal 2020. In our opinion, this provides independent schools the flexibility to address rising costs associated with inflation and the return to in-person learning. We view improved liquidity and financial flexibility as a positive credit factor overall.

Table 2

Sectorwide Ratios For U.S. Independent Schools
Fiscal Year 2021 2020 2019
Sample size 40 42 42
Total headcount 686 710 689
Freshman selectivity rate (%) 37.5 38.3 33.5
Freshman matriculation rate (%) 65.4 67.1 66.4
Revenue diversity
Tuition dependence (%) 67.7 69.3 69.9
Investment & endowment income (%) 10.3 9.1 10.5
Private gifts (%) 7.7 6.7 6.1
Financial aid and expense ratios
Tuition discount rate (%) 24.3 22.8 23.3
Financial aid burden (%) 16.1 15.4 15.8
Instruction (%) 40.8 43.9 42.5
Endowment market values ($000s) 136,869 101,390 103,444
Total debt outstanding ($000s) 30,006 28,789 32,006
Contingent liability ($000s) 29,145 22,822 22,156
MADS burden (%) 4.87 5.22 5.37
Average age of plant (years) 14.5 14.0 13.2
Annual capital expenses ($000s) 3,610.5 3,978 4,675
Financial resources
Cash and investments to operations (%) 358.9 263.0 270.6
Cash and investments to debt (%) 578.5 429.3 420.1
Expendable resources to operations (%) 204.3 151.6 185.7
Expendable resources to debt (%) 354.4 217.5 239.6
Net operating income (%) 4.0 3.4 2.7
Per student ratios
Net tuition revenue per student ($) 36,321 36,127 37,470
Total adjusted operating revenue ($) 71,490 61,274 66,476
Total adjusted operating expenses ($) 66,378 59,315 61,659
Total debt outstanding ($) 41,085 39,473 42,736
Expendable resources ($) 132,958 83,141 93,809
Endowment market value ($) 182,265 122,190 144,734

We have also included a comparison of median metrics over the past three years by rating category, which reflect that, on the whole, demand and financial metrics have been generally stable although pockets of stress remain for lower-rated issuers. Tuition dependence median levels for 'AA' and 'A' rated schools, which represent the vast majority of ratings within the sector, were stable from 2020 to 2021. And while tuition dependence for schools in the 'AAA' category declined for fiscal 2021, these ratios increased meaningfully for 'BBB' category issuers at the median year over year. Similarly, the most meaningful shift in the financial aid burden and tuition discounting occurred at the 'BBB' median where we observe notable increases during the period.

The median for average age of plant seems to be rising year over year. Schools that have benefited from improved market returns might look to use their strengthened balance sheets to address deferred maintenance or capital projects. And while some schools are taking advantage of improved resources and low interest rates to start campus projects, the cost of labor and construction materials could stress capital budgets and schools might continue to defer projects over the next year. From a cost management perspective, in tandem with capital campaign fundraising, the funding of deferred maintenance costs through operations in an amount equal to depreciation annually could be one way that schools attempt to manage necessary future capital spending.

Table 3

Medians For U.S. Independent Schools Over Time
2019 2020 2021 2019 2020 2021 2019 2020 2021 2019 2020 2021
Sample size 5 4 5 12 12 12 17 17 16 7 8 7
Total headcount 660 840 650 574 574 521 699 732 712 701 809 697
Freshman selectivity rate (%) 16.6 16.1 15.5 19.5 19.9 21.5 40.6 41.9 40.5 50.8 57.4 57.5
Freshman matriculation rate (%) 73.7 73.2 71.2 65.7 66.4 65.9 66.6 67 65.4 64.5 59.3 55.2
Revenue diversity
Tuition dependence (%) 48.4 44.6 49.4 61.1 63.3 63.5 71.7 73.5 72.6 83.6 86.5 77.8
Investment & endowment income (%) 36.1 32.4 25.9 16.5 18.5 19.2 7.5 8.2 7.6 2.7 2.6 2.5
Financial aid
Tuition discount rate (%) 35.0 30.2 31.2 25.0 25.9 25.5 20.8 22.3 23.2 17.7 17.1 19.9
Financial aid burden (%) 16.9 15.6 16.4 13.5 15.0 14.2 16.3 16.2 16.1 14.6 14.8 16.6
Endowment market values ($000s) 631,037 875,266 863,553 175,437 166,252 212,212 92,009 80,205 100,541 39,414 28,046 51,927
Financial resources
Cash and investments to operations (%) 948.7 948.6 1096.2 478.5 495.5 555.8 225.6 250 298.7 108.3 119.9 159.2
Cash and investments to debt (%) 982.7 1181.2 1329.0 637.4 564.8 732.2 367.4 416.3 516.3 216.6 202.8 314.1
Expendable resources to operations (%) 666.4 690.9 846.4 272.3 270.4 391.1 152.5 137.9 185.4 90.2 64.4 91.7
Expendable resources to debt (%) 707.6 757.2 1026.2 370.4 339.4 448.2 225 207.7 267.8 118.5 92.3 143.3
Per student ratios
Total adjusted operating revenue ($) 117,171 113,049 123,614 84,863 82,715 84,995 62,993 55,158 58,989 40,250 37,302 44,911
Total adjusted operating expenses ($) 113,864 118,605 127,450 78,551 75,815 80,727 56,633 53,074 56,280 39,544 36,882 40,796
Total debt outstanding ($) 109,333 98,272 105,455 69,443 68,491 80,284 32,534 28,958 30,564 32,733 28,607 32,745
Endowment market value ($) 989,030 1,068,197 1,328,543 381,082 374,713 495,042 89,440 87,266 111,661 44,687 38,402 48,939

Table 4

Independent School Ratings By Category As Of Jan. 31, 2022
Institution State Rating Outlook
Deerfield Academy MA AAA Stable
Hotchkiss School CT AAA Stable
Phillips Academy Andover MA AAA Stable
Phillips Exeter Academy NH AAA Stable
St. Paul's School NH AAA Stable
Groton School MA AA+ Stable
Peddie School NJ AA+ Stable
St. Andrew's School of Delaware, Inc. DE AA+ Stable
Milton academy MA AA Stable
Thacher School CA AA Stable
The Hockaday School TX AA Stable
Chapin School NY AA- Stable
George School PA AA- Stable
Hopkins School CT AA- Stable
Horace Mann Sch NY AA- Stable
Roxbury Latin School MA AA- Stable
St. George's School RI AA- Stable
Belmont Hill School MA A+ Stable
Brunswick School CT A+ Stable
Emma Willard School NY A+ Stable
McDonogh School, Inc. MD A+ Stable
Collegiate School VA A Stable
Kent Denver School CO A Stable
Kent School Corp. CT A Stable
Millbrook School NY A Stable
Saint Xavier High School OH A Stable
The Haverford School PA A Stable
Westminster School CT A Stable
Westtown School PA A Stable
Albuquerque Academy NM A- Stable
Ethical Culture Fieldston School NY A- Stable
Garrison Forest School MD A- Negative
Holton-Arms School MD A- Stable
Carolina Friends School NC BBB+ Stable
Dexter Southfield School MA BBB+ Stable
Germantown Academy PA BBB+ Stable
Masters School NY BBB+ Stable
Mid-Pacific Institute HI BBB+ Stable
Thayer Academy MA BBB+ Stable
Vail Mountain School CO BBB- Stable

Table 5

Glossary Of Ratios And Terms
Ratio Definition
Demand ratios
New student selectivity rate (%) Number of new students accepted/total number of applications
New student matriculation rate (%) Number of new students enrolling/number of students accepted
Revenue diversity
Tuition (%) Gross tuition and fees/total adjusted operating revenues
Investment & endowment income (%) Endowment income and investment income/total adjusted operating revenues
Private gifts (%) Private gifts/total adjusted operating revenues
Financial aid and expense ratios
Financial aid burden (%) Total financial aid costs/total adjusted operating expenses
Tuition discount (%) Total financial aid costs/gross tuition and fees
Instruction (%) Instructional costs/total adjusted operating expenses
Debt ratios
Total debt outstanding ($000s) Par amount of all debt outstanding
Maximum annual debt service (MADS) burden (%) MADS/total adjusted operating expenses
Average age of plant (years) Accumulated depreciation/depreciation expenses
Financial resources ratios
Cash and investments to operations (%) Total cash and investments/total adjusted operating expenses
Expendable resources to operations (%) Expendable resources/total adjusted operating expenses
Cash and investments to debt (%) Total cash and investments/total debt
Expendable resources to debt (%) Expendable resources/total debt
Net operating income (%) Net adjusted operating income/total adjusted operating expense
Per student ratios
Net tuition revenue per student ($) Net tuition revenue/total headcount
Total adjusted operating revenue per student ($) Total adjusted operating revenue/total headcount
Total adjusted operating expense per student ($) Total adjusted operating expense/total headcount
Total debt outstanding per student ($) Total debt outstanding/total headcount
Expendable resources per student ($) Expendable resources/total headcount
Endowment market value per student ($) Endowment market value/total headcount
Net tuition revenue Gross tuition and fees - financial aid
Total adjusted operating revenues Unrestricted revenues - realized and unrealized gains/losses + financial aid
Total adjusted operating expenses Unrestricted expenses + financial aid expense
Cash and investments Cash + short-term and long-term investments
Expendable resources Net assets without donor restrictions + net assets available for appropriation - (net property plant and equipment - long-term debt outstanding)

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Mel Brown, New York + 3122337204;
Chase C Ashworth, Centennial + 1 (303) 721 4289;
Secondary Contacts:Jessica L Wood, Chicago + 1 (312) 233 7004;
Avani K Parikh, New York + 1 (212) 438 1133;
Research Contributors:Arpita Ray, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Nikita Salunkhe, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Karan Makhija, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

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