Universities given credit downgrade

Fri, 02/26/2016 - 7:00am | Julie Wurth

Several beleaguered Illinois universities took another hit this week, with Moody's Investor Service downgrading their credit ratings because of the ongoing state budget crisis.

Northern Illinois University and Northeastern Illinois University saw their ratings lowered to Baa2 and Baa3, just above "speculative" or "junk bond" status, while Eastern Illinois University is now below investment grade, dropping from Baa3 to Ba1 and Ba3.

The ratings range from a high of Aaa, or "prime," to C, which signals default.

Schools use the bond market to borrow money for new classroom buildings, laboratories or residence halls, or just to consolidate debt. They secure the loans with student fees, housing payments, clinic income or other sources of money.

The lower the bond rating, the higher the interest rate will be for the schools to pay back that money. Ideally, schools want a high rating so they can borrow at a cheaper rate and keep their overall debt low.

"Without state money coming in, this would be what's expected over time, that the financial situation of these institutions will continue to erode, and the bond markets will continue to notice that," UI education finance Professor Jennifer Delaney said of Wednesday's announcement by Moody's. "In general, it's a signal to the market and also, frankly, the students and families about the financial health of the institutions."

All state public universities continue to carry a "negative outlook" from Moody's, which means that further downgrades could be likely depending on what happens with the state budget.

Moody's cited Eastern's "increasing vulnerability to the ongoing state budget impasse given its thin liquidity, declining enrollment and high reliance on state funding." The school's reserves are expected to be exhausted by the end of the fiscal year on June 30, Moody's said.

Moody's again affirmed the UI's credit ratings, with a negative outlook. The rating affects about $1.6 billion in debt held by the university, for its auxiliary facilities system (Aa3), which includes the State Farm Center and residence halls; certificates of participation (Aa3); south campus development bonds in Chicago (A1); and health services facilities system in Chicago (A2).

The affirmation reflects the UI's "very good liquidity that provides it with significant flexibility to manage the lack of direct state funding as the state budget impasse continues," Moody's said.

Other factors in the UI's favor: strong student demand, more than $5.5 billion in revenues from diverse sources, and a favorable balance sheet with a "modest" debt burden. But Moody's noted that the UI is constrained by the state's financial challenges, and a growing amount of its state appropriation is consumed by pensions and other benefits, "pressuring the university's core educational and general budget."

Analysts also expect "some weakening of operating cash flow" at the UI this fiscal year.

Moody's affirmed its previous ratings for Southern Illinois University (Baa1) and Western Illinois Univeristy (Baa3).

The ratings agency assigned an A3 to Illinois State University's upcoming $40 million revenue bond sale for its auxiliary facilities system and affirmed ISU's previous A3 ratings. Analysts cited strong reserves and debt-service coverage for the system, and noted that ISU is "one of the state's largest public universities with a strong regional reputation and fiscal stewardship."

The school has sufficient reserves and endowment funds to mitigate the state's budget impasse for now, and also has stable enrollment, Moody's said.

For Northern, the downgrade is based on the expectation of weakening cash flow and liquidity without state appropriations. Moody's said the ratings reflect actions taken by Northern to trim expenses and "carefully manage liquidity cope with the state budget impasse," and its position as one of Illinois' largest regional public universities with diverse academic offerings.

But analysts also said its cash flow will continue to narrow because of enrollment declines, and cited its "relatively modest" reserves.

Northeastern's financial liquidity puts it in a better position to weather cuts than some of its peers, Moody's said, but that's offset by a decline in its operating performance and the state funding delay. The Chicago school, which has a large Hispanic population, is hoping that opening its first residence hall in 2016 will boost its market profile but early demand has been "weak," Moody's said.

Above is from:  http://www.news-gazette.com/news/local/2016-02-26/universities-given-credit-downgrade.html