Moody’s Downgrades ASU’s Credit Rating


On January 26th, the leading investment firm Moody’s Investors Service downgraded Adams State University’s (ASU) credit rating. Moody’s lowered ASU’s rating to A3 with an underlying rating of negative. The full report can be viewed here. Moody’s had previously revised ASU’s credit rating to outlook negative, A2 underlying in August 2014, citing “ongoing operating deficits and thin debt service coverage with limited ability to grow revenue and contain expenses.”

Moody’s states that they “provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged.” There are nine ratings provided from Aaa to C. An A3 rating is the lowest of the A classification ratings and considered to be on the low end of “investment grade” assets.

The rationale for this credit downgrade cited “ASU’s ongoing operating deficits, thin debt service coverage and weakened liquidity. ASU’s mission to remain sensitive to tuition and fee pricing restrains its ability [to] contain expenses and to grow healthy reserves.”

Moody’s identified ASU’s newly-announced Guaranteed Tuition policy as among the reasons for the downgrade, noting “The negative outlook reflects uncertainty in the university’s ability to successfully balance operating performance in the face of variable state operating support and declining enrollment. A high need student population and ongoing tuition increases, as well as a planned guaranteed tuition pricing program, could potentially hinder longer term enrollment growth and intensify top line pressure.”  For more on potential problems with ASU’s Guaranteed Tuition policy, see Guaranteed Tuition a Guaranteed Distraction.

In the 2014 report, Moody’s wrote “Adams State’s unrestricted cash and investments that could be liquidated within one month cover under four months of cash expenses, providing little cushion for challenged operations, particularly in light of ongoing operating deficits.”  Essentially, Adams State is operating paycheck-to-paycheck and has been for some time.

One ASU faculty member reacted to Moody’s recent downgrade by stating, “The biggest problem here is that ASU will likely face slightly higher interest rates than universities and colleges ranked higher than us. That is, the rate at which we are able to borrow will increase.” Additionally, a lower credit rating may prevent future borrowing until some of ASU’s $52 million of rated debt is paid off.

Moody’s also added “Adams State is highly leveraged (1.51 times debt to operating revenue in FY 2013) and debt service coverage is thin.”  In common terms, this means ASU is “maxed out” on its borrowing limits.

It is difficult to understand how this could be considered good news for ASU. Nonetheless, the Valley Courier published an article on January 28th “stressing that the university is poised for improvement in its debt rating.” Given that it is without a byline, this article was likely written by ASU public relations in an attempt to frame the credit downgrade on positive terms and promote the guaranteed tuition policy as a marketing tool despite Moody’s citing it as “potentially hinder[ing] long term enrollment growth.” Uncritical news coverage like this is precisely the impetus for Watching Adams to exist.

In recent years, many market analysts have forecast an “education bubble” bursting in the higher education sector. This is similar to the U.S. housing bubble that burst in 2007-2008, triggering what has become known as the Great Recession. ASU’s credit downgrade from Moody’s may reflect a recognition that this broader trend is adversely affecting Adams State. The Washington Post reported in July 2014 that “Moody’s has downgraded three dozen other four-year colleges and universities since July 2013, a sign of continuing financial fragility in higher education. By contrast, nine of about 500 higher-ed institutions that Moody’s analyzes were given credit rating upgrades in the past year.”

What do you think?  Watching Adams has posted a poll on this issue here.