Bond agencies watch U. of C.

By LINDSAY WELBERS
Staff Writer

Two of the big three credit rating agencies took moves that may result in lower credit ratings for the University of Chicago.

Both Standard & Poor’s and Moody’s Investors Services revised their outlook on the U. of C.’s bond and debt ratings from stable to negative last week. S&P will review the university’s $2.6 billion rated debt bonds within 90 days but could downgrade them from AA, the second highest rating possible, to AA-.

Moody’s negative outlook means there is downward pressure on the rating and a chance it could be downgraded from Aa1 to a lower rating in the next 12 to 24 months.

Both financial ratings services cited a decline in revenue during the 2013 fiscal year and the university’s plans to take on hundreds of millions of dollars in debt beginning in 2015 as reasons for the revision. S&P noted that the university plans to take on between $600 and $900 million dollars in debt through 2018.

Fitch Ratings, the other of the big three credit rating agencies, affirmed on Monday, Jan. 27, its very high long-term “AA+” rating and its short term “F1+” rating for various university bonds and said its outlook is stable.

Fitch called the university’s debt burden “slightly high” at 11.7 percent of its unrestricted operating revenue, but said it considered that amount manageable.

“The demand on cash flow will be exacerbated from an expected debt issuance within the calendar year. An increasingly important factor in University of Chicago’s credit profile the impact of UCMC’s negative outlook reflecting thinner operating margins driven by a significant increase in transfers to the university that are expected to continue in the near term,” Moody’s said in its report, released Tuesday.

credit2

S&P revised the U. of C.’s Jan. 28 revenue bond outlook on Thursday saying that the revision reflects the worse-than-anticipated financial performance in 2013 along with its strategic plan for deliberate deficits through 2018, the issuance of $300 to $400 million in additional debt in fiscal 2015 and another $300-500 million on top of it from fiscal year 2015 to 2018.

Both financial agencies reaffirmed that the revision has not yet affected the U. of C.’s high ratings, Aa1 for Moody’s and AA for S&P.

S&P could revise its rating for the university within 90 days. S&P credit analyst Jessica Matsumori said “We recognize that management and board adopted the strategic plan after significant deliberation and that the initiatives of this plan will help better position the university, but the prolonged deficits and additional leverage produce credit risks that may result in a credit profile more in line with the ‘AA-’ rating.”

In its 2012 Annual Report the university noted that it had $6.57 billion in its endowment, including $870 million for the medical center. President Robert Zimmer was paid $3.4 million in 2011, making him the highest-paid private university president in America.

The recession did damage to the university’s portfolio but it spent on new infrastructure including the new Harper Court and other retail investments on 53rd Street, the $700 million Center for Care and Discovery, the demolition of Pierce Hall, construction of a Jeanne Gang-designed dormitory complex and opening a satellite campus in Beijing.

“In recent years, the University of Chicago has undertaken a set of strategic initiatives to ensure its long-term eminence, making significant investments in faculty and students, in programs, and in the facilities needed to support them. Made possible by fiscal discipline and highly coordinated financial governance, that strategic investment has allowed the University to flourish during a difficult economic period,” said U. of C. News Director Jeremy Manier.

“The University remains committed to carefully crafted financial plans that seek long-term financial health and flexibility while supporting academic eminence through strategic investment. The Board of Trustees thoughtfully and thoroughly reviews the University’s financial plans and they are in full support of the current trajectory.”

l.welbers@hpherald.com