CHICAGO - Moody's Investors Service downgraded the University of Chicago one notch to Aa2 as the school prepares to take on more debt.
"Indications are that the university's investment in strategic priorities is yielding favorable results that will position it well in the future," Moody's said. "However, risk is elevated over the next several years until the university is able to translate its strategic successes into strengthened cash flow to absorb growing debt service."
The university intends to sell up to $175 million of tax-exempt new money bonds and up to $400 million of tax-exempt refunding bonds next month using the Illinois Finance Authority as conduit issuer. The university will sell another $175 million of taxable new money. The final size depends on interest rates at the time of pricing.
Moody's assigned a stable outlook to the rating at the lower level. It had previously assigned a negative outlook. Standard & Poor's affirmed its AA rating and the negative outlook it assigned in February.
"The rating reflects our view of the university's strong enrollment and demand as well as its exceptional fundraising ability," said Standard & Poor's analyst Jessica Matsumori. "The negative outlook reflects our view of its worse-than-anticipated fiscal 2013 financial performance combined with the university's recently adopted strategic financial plan, which calls for deliberate deficits through fiscal 2018 and $300 million to $500 million in additional debt from fiscal 2015 to 2018."
The university has a total of $3 billion of outstanding bonds including debt of the University of Chicago Medical Center and its full authorization of commercial paper.
The university's strengths include its "global prominence as an elite research university, with exceptionally strong student demand at both the undergraduate and graduate level, demonstrated fundraising prowess for strategic initiatives, and growing unrestricted liquidity," Moody's said.
Graduate students make up 60% of enrollment and only 8.8% of freshman applicants are accepted. The school raised $459 million from fundraising during fiscal 2013 and a higher level is expected in fiscal 2014 during the early stages of a $4.5 billion campaign. The school had research awards of $450 million in fiscal 2013 and $1.2 billion for its work at the two federal laboratories -- Fermi National Accelerator Laboratory and the Argonne National Laboratory - that it manages.
The strengths are offset by its high debt levels, a failure to achieve expected operating results with weak performance expected to continue over the next several years, and employee benefit liabilities. Its defined benefit plan is $237 million underfunded and the university carries $248 million of unfunded other post employment benefits.
The school also has substantial exposure to more volatile health care revenue through its medical center which operates in a highly competitive region and exposes the university to pressures from government payors. Moody's assigns a Aa3 and negative outlook to the medical center debt.
Barclays is the senior manager with PNC Capital Markets as co-senior manager and Loop Capital Markets LLC and William Blair & Co. as co-managers. Chapman and Cutler LLP is bond counsel. Prager & Co. is borrower counsel. Acacia Financial Group is advising the IFA.
Projects include a new residence hall and dining commons and various other capital improvements at the school's administrative, academic and research facilities and general campus infrastructure improvements.
