BRADENTON, Fla. - Moody's Investors Service dropped Alabama State University's $230 million of outstanding bonds to junk, citing an inability to cover debt service for a multi-year period among the reasons.
Moody's downgraded ASU's general tuition and fee revenue bond rating to Ba1 from Baa1, and lowered the 2005 lease revenue bonds to Ba2 from Baa2 on July 3. The bonds were issued by the Montgomery Public Education Building Authority.
The outlook is negative after the three-notch downgrade.
"The downgrade to Ba1 reflects the continued weakening financial condition of the university evidenced by declining liquidity, extremely high operating leverage, and inability to cover debt service for a multi-year period," said analyst Mary Kay Cooney. "Ongoing weak operating performance required a draw on reserves to cover debt service in 2014 and this is expected to continue through at least 2015, if not longer, resulting in weakening liquidity."
Cooney said a history of weak governance and expense control "reduces the prospects that the university will be able to rapidly and strategically restore operating equilibrium."
The downgrades also incorporate action by the Southern Association of Colleges and Schools Commission on Colleges June 19 to place ASU's accreditation status on "Warning."
The accreditors found "significant" non-compliance by the university in six areas - the governing board, board conflict of interest, financial stability, control of finances, control of sponsored research/external funds, and Title IV program responsibilities, according to Moody's.
The negative outlook reflects expectations that there will be further erosion of flexible reserves and an inability to cover debt service from operations, said Cooney. It also incorporates the uncertain outcome of the accreditor's warning status.
The downgrade - the third in 18 months - is "a very serious issue," Alabama State University President Gwendolyn Boyd said in a statement on al.com.
"We are committed to turning the tide through the new ASU reorganization plan, fiscal austerity, and the implementation of sound financial best practices to restore our university's credit rating," she told the publication.
ASU is a medium-sized, historically black public university in Montgomery with diverse program offerings. Enrollment was an all-time high of 5,726 students in the fall of 2013.
Moody's said that a credit strength is the fact that state officials have become more involved with the governance of the university in the last year.
