IWU Takes a Fall

Moody’s Investors Service on Monday downgraded Illinois Wesleyan University’s rating to Baa1 from A3 on $52.2 million of debt due to ongoing operating deficits and weak cash flow.

The debt was sold through the Illinois Finance Authority. The decline in financial resources is straining the university’s balance sheet and providing a less-robust cushion for outstanding debt and annual operations than in the past. The outlook at the lower rating is stable.

IWU has an additional $30 million of variable-rate debt outstanding that is supported by a letter of credit from Northern Trust Co. The bank can demand immediate repayment if IWU violates covenants tied to debt service coverage and liquidity ratios. It currently is in violation but has received a waiver from the bank and is renegotiating the terms. It does have $60 million of unrestricted and temporarily restricted cash and investments that “helps mitigate some of the risk associated with the debt structure,” Moody’s wrote.

The university has a floating- to fixed-rate swap agreement with JPMorgan that expires in 2011 on a piece of its variable-rate debt. It could face a termination event if its rating falls below Baa2.

IWU saw a large decline of 39% to $47.9 million in its unrestricted financial resources in fiscal 2008 due to operating declines, investment losses, and growing post-retirement health care liabilities. Debt service in fiscal 2008 was also a low 0.7 times.

Strengths include a strong market position in a competitive market with acceptance and matriculation rates of 52.4% and 34.2%, respectively, in fall 2008.

Its weak operating performance is expected to improve due to changes in budgeting practices. The university will end its long-standing practice of supplemental endowment draws and expects a $10 million decline this year in post-retirement expenses due to changes in eligibility.

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