Possible Sandusky liabilities cited in Moody's credit-rating downgrade

UNIVERSITY PARK, Pa (Oct. 26) -– Moody's Investors Service has downgraded Penn State's long-term rating of Aa1 to Aa2 with a stable outlook, after a 90-day review of the University's financial situation and an assessment of the ongoing uncertainty related to possible legal challenges.

However, in its report released today, Moody's indicated that Penn State's research, fund-raising and enrollments remain strong. "We expect that Penn State will remain a leading U.S. public university with favorable student demand, positive operating performance, high donor support and a strong research position," the report read.

"This action will have no impact on tuition, and fortunately, due to historically low interest rates and no anticipated borrowing in the near future, will have a negligible financial impact," said David Gray, senior vice president for Finance and Business/Treasurer.

University officials said they take Moody's action seriously, but were not surprised by it in light of the current economic climate and the multiple challenges facing the institution from the child molestation scandal involving former assistant coach Jerry Sandusky.

Moody's noted that Penn State's "substantial reforms reflecting best practices are now under way …" with respect to governance and leadership issues, but the credit rating firm also acknowledged there are still more changes looming – including the replacement of its provost, for which a search is currently under way, and its president. The presidential search is expected to launch in November.

In its report, Moody's said the primary driver for the downgrade is the uncertainty of the financial impact on the University from the ultimate cost of future settlements and possible judgments stemming from sexual abuse claims made by Sandusky's victims. Moody's added that the stable outlook reflects expectations that the University will ultimately resolve victims’ claims and that it will continue its work to implement substantial governance reforms.

Penn State has been on Moody's "watchlist" since July 24. Today's report also points to the remainder of the 119 recommendations found in the Freeh Report that still need to be implemented. The report's recommendations, issued by former FBI director and independent investigator Louis Freeh, were designed to strengthen policies and performance in areas such as safety and governance. Penn State officials recently announced that one-third of the recommendations had already been implemented.

Moody's report also cited enrollment and tuition pricing challenges related to an ongoing demographic decline in the number of high school graduates in Pennsylvania, and substantial and growing costs stemming from retiree health care benefits and rising pension payments.

In addition, the Moody's report examined the University’s strengths, including:
-- The "major multi-faceted role" played in the state by Penn State as Pennsylvania's flagship public and land grant university with more than 84,000 full-time equivalent (FTE) students and $700 to $800 million in research grants annually;
-- Its favorable location near major east coast population centers;
-- Penn State’s agricultural research services, which affect nearly every county in the state and are widely recognized outside of Pennsylvania as well;
-- The Board of Trustees' commitment to act quickly to resolve abuse claims and outstanding litigation. In addition, the board also has taken quick action to implement best practice reforms recommended by the Freeh report;
-- Consistently favorable operating performance and cash flow generation;
-- Substantial liquidity of funds;
-- Low reliance on state funding; and
-- Continued fundraising success.

Penn State's new rating of Aa2 is the third-highest category of Moody's 21 possible ratings and places the University in the same category as 44 other public U.S. institutions.

Moody's announcement follows on the heels of a revised credit outlook released Oct. 17 by Standard & Poor's. In its report, S&P reaffirmed the University’s underlying AA rating but revised the outlook from stable to negative. S&P's report cited potential financial liability tied to Sandusky as a reason for the change.

"Penn State's credit rating through S&P remains AA, its third-highest investment grade," Gray said. "Our current credit metrics remain consistent within every category and we remain among the top 40 public-rated institutions in the country."

In terms of the S&P outlook, the University now maintains the same rating as the Commonwealth of Pennsylvania. S&P also noted the University's strong performance track record. The Aa2 rating from Moody's is also the same for the Commonwealth.

"For both agencies, uncertainty of any settlements and outcomes was the primary consideration," Gray said. "I am confident that our underlying financial status suggests that we will remain among the top universities in creditworthiness.”

 

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Last Updated March 08, 2013