Morehouse College credit rating cut, Kennesaw State University stable, in volatile higher ed bond market
By David Pendered
Morehouse College, the alma mater of Martin Luther King, Jr., has received a credit rating that’s barely investment grade, and with a negative outlook, on $23.4 million in bonds to be sold this week. The rating is just three notches above a rating of speculative.
Kennesaw State University has received a credit rating that’s solid investment grade, and stable, on $41.6 million in bonds slated for sale last month.
These two ratings illustrate the divergence of credit risk among Georgia’s institutions of higher learning. As state lawmakers consider Gov. Nathan Deal’s proposal to borrow almost $200 million this year to expand facilities at public colleges and universities, they face going to market in a sector dinged as negative across the board by Moody’s Investors Services.
Last week, Moody’s cut its outlook to negative for the entire sector of higher education. The Jan. 16 announcement cited duress among, “key university revenue sources.”
Changes in the revenue streams include dwindling government support for higher education and campus research, and spiraling tuition costs as students and parents question the return on investment of a college degree.
According to Eva Bogaty, the Moody’s vice president who was the lead author on the report:
- “The US higher education sector has hit a critical juncture in the evolution of its business model. Even market-leading universities with diversified revenue streams are facing diminished prospects for revenue growth.”
This is the investment climate in which Georgia will operate when it goes market with some $193 million bonds to finance expansion at its colleges and universities.
Deal proposes in his FY 2014 budget, which begins July 1, to issue several packages of 20-year, tax-exempt bonds. Other offerings would be for shorter terms, or taxable. The long-term, tax-exempt notes include:
- $40 million for improvements to facilities at campuses statewide;
- $58.8 million for a law school/humanities classroom building at Georgia State University, in Atlanta;
- $10 million for a health services and counseling center at Georgia Southern University, in Statesboro;
- $10 million for a military and veterans academic and training center at Middle Georgia State College, in Warner Robins.
The recent Moody’s rating of an offering from Kennesaw State University, in Kennesaw, provides a glimmer of hope that some or all of the state’s possible offerings will get a solid rating.
Higher credit ratings translate to lower interest rates, as investors get a lower return in exchange for a better probability they will be paid their expected return.
In November, Moody’s gave a rating of A1 to KSU’s planned sale in December of $41.6 million in revenue bonds. Details of the planned sale were not publicly available late Tuesday.
In its supporting rationale, Moody’s cited KSU’s enrollment of about 22,000 students, location in Atlanta’s northern suburbs, and a strong commitment for rental payments from the Board of Regents.
- “The A1 rating reflects the strong implied support of the Board of Regents (lease revenue debt rated Aa3) and revenue breadth, as well as the foundation’s financial reserves and moral obligation to the university. The rating also reflects the university’s healthy market position, large operating and enrollment base and adequate operating performance.”
Morehouse was viewed differently from Kennesaw State.
Morehouse’s enrollment is much smaller, and Moody’s determined that the school is struggling to meet enrollment targets, cash flow is thin, and uncertainty hangs over federal funding and philanthropic giving.
- “The downgrade of Morehouse College’s rating to Baa1 and negative outlook is based on the college’s inability to achieve its targeted enrollment for fall 2012, further declines in financial resources and liquidity, thin unrestricted liquidity, negative operating margins, and weak cash flow and debt service coverage.”
Morehouse ranks third on U.S. News’ sheet of historically black colleges and universities. The student body of more than 2,400 students paid tuition and fees of almost $24,000 a year for the 2011-’12 academic year, according to U.S. News.