UI's credit rating gets downgrade
Moody's Investors Services has downgraded its ratings on $1.56 billion of debt issued by the University of Illinois, just as the UI was preparing a $77 million bond sale to pay for renovations at its hospital in Chicago.
Moody's lowered its credit ratings on six other state universities on Friday, too, citing concerns about the potential impact on their finances from the state's pension crisis. Northern Illinois University's ratings remained unchanged.
"If pension reform is passed, UI may need to fund a portion of its pension expense, possibly as early as FY 2015," the Moody's report said. "If pension reform fails to be enacted, we expect continued pressure on state operating appropriations."
The UI also received a "negative" outlook, meaning further downgrades are possible in the next 12 to 24 months because of precarious state finances and pressures on other sources of revenue, Moody's said. It noted that a "significant portion" of the UI's operating revenue comes from the state, which has delayed payments or reduced funding for several years.
The announcement was not a surprise, given that Moody's had downgraded the state of Illinois' bond rating in June to the lowest level among U.S. states after legislators failed to enact pension reforms. Moody's announced at the time that it would review all Illinois public universities.
Moody's on Friday lowered its rating on the UI's Auxiliary Facility System Revenue Bonds and Certificates of Participation to Aa3 from Aa2, on a scale of Aaa being the highest and A3 being the lowest. The agency also lowered its rating on the university's South Campus Development Bonds in Chicago to Aa3 from Aa2 and its ratings on the UI's Health Services Facilities System Bonds to A2 from A1.
Auxiliary system bonds are used mostly for housing projects.
"It's disappointing and unfortunate, but it doesn't come as a surprise," said UI spokesman Tom Hardy. "We're a public university in Illinois, a state that's not well regarded by the financial ratings houses for a multitude of reasons."
On the plus side, Aa3 is still Moody's fourth-highest rating (out of 21) and slightly above the average of A1 for the 228 four-year public universities rated by the agency, said Moody's spokeswoman David Jacobson.
Double-A ratings generally are considered high quality and low credit risk, he said. And the UI's rating is several notches above the state's rating of A3.
Some of the UI's peers hold triple-A ratings, such as the universities of Michigan, Virginia, North Carolina and Texas.
The Moody's report said the UI is financially sound overall, with healthy tuition revenue, more than $700 million in total research expenditures and growing fundraising success. That's allowed it to build up significant liquidity and cash reserves, with $723 million in unrestricted cash as of June 30, 2012, Moody's said.
"This provides it with significant flexibility to withstand operating disruptions and has enabled the university to manage the delayed payments from the state," the report said, praising the UI's "proactive management."
With nearly 77,000 students, the UI continues to enjoy strong demand as the state's flagship university and could increase tuition to mitigate state funding pressures, Moody's said.
Hardy said the immediate impact of the change will be limited, because most of the university's debt is at a fixed interest rate and won't be affected.
But it could cost the university money as it prepares to borrow money for the renovation of the 33-year-old UI Hospital, which is already underway. The UI had planned to issue the bonds this week, but that's been delayed by a week or two until the UI receives a specific rating for that bond sale from Moody's, Hardy said.
Ratings for individual bond sales are usually tied to the long-term ratings but can vary depending on the financing instrument used, according to Moody's.
UI officials wouldn't speculate on how much the UI's borrowing costs might increase, for either the hospital project or a bond issue planned by early next year to pay for the renovation of the State Farm Center and ongoing redevelopment at the Ikenberry Commons housing complex.
Lower ratings usually mean bonds have to carry higher interest rates to entice investors because of the higher risk, officials said.
"We'll just have to see what the market is at the time that the bonds are issued," Hardy said.
Moody's said the UI's health system exposes it to additional risks, as it relies heavily on Medicaid and Medicare for revenue and those programs are under budgetary pressure at the state and federal level. The UI already has $60 milllion of health service facilities system bonds paid for with revenue from the hospital and medical service plan in Chicago.
The UI's debt also includes $1 billion of auxiliary revenue bonds, which paid primarily for housing projects such as Ikenberry Commons that are being paid back by a portion of student housing fees; $500 million of certificates of participation, which have paid mostly for deferred maintenance and other renovation projects over the last two decades; and $40 million to $50 million of South Campus Development bonds, which are being repaid with tax increment finance district revenue.
Moody's said an upgrade is unlikely for the UI, given the magnitude of the state's unfunded pension liability. It said the UI's outlook could improve to "stable" if legislators approve pension reforms that "would not significantly impair the university's financial strengths."