SAN FRANCISCO — St. Mary’s College of California said it disagrees with Moody’s Investors Service’s assessment of its finances after the rating agency put $69 million of variable-rate bonds on watch for a downgrade.
Moody’s said it has placed the college’s underlying rating of Baa1 on its watch list out of concerns the college may be unable to meet covenants tied to the debt.
“The rating action primarily reflects the college’s limited unrestricted liquidity as compared to its variable-rate demand obligations and the heightened risk of acceleration of this debt should the college fail to comply with the covenants,” Moody’s analyst Eva Bogaty said in the report released Tuesday.
The rating agency said concerns center on the college meeting covenants tied to agreements with Bank of America, its letter-of-credit provider; National Public Finance Guarantee Corp., its insurer; and the California Educational Facilities Authority, its conduit issuer.
The college challenged Moody’s take.
“I do not agree with Moody’s financial assessment of the college,” Peter Michell, vice president of finance at the college, said in an e-mail. “The risk of violating a credit covenant and defaulting on the college’s bonds is low from the perspective of college operations.”
Michell said the college is much stronger financially and has a higher enrollment since Moody’s last rated the college in August 2009. He said St. Mary’s is working on contingency plans with Bank of America regarding its credit covenants.
He also said the school is looking into restructuring possibilities with its financial adviser Public Financial Management Group.
St. Mary’s College, founded in 1863, has around 4,000 undergraduate and graduate students. It is located in Moraga, Calif., 20 miles east of San Francisco.
The school had an operating budget of more than $100 million and an endowment of $111 million in fiscal 2010.
The college has issued 96% of its debt in variable-rate mode with the bonds backed by a two-year letter of credit with Bank of America that expires in 2013. The bonds are unsecured general obligations.
Moody’s said the review of St. Mary’s debt will focus on its plan to comply with the covenants, the likelihood of accelerated payments, and available liquidity if debt payments increase.
According to the report, the college must maintain a minimum unrestricted cash and investments to debt ratio of 0.25 times and a minimum debt service coverage ratio of 1.25 times to comply with the letter of credit agreement. It must also keep a rating of Baa1 or higher.
St. Mary’s unrestricted cash and investments to debt ratio was 0.4 times and its debt service ratio was 3.71 times in its preliminary June 30, 2011, figures.
Moody’s said failure to keep to the terms of the letter of credit with Bank of America after a 60-day period would be considered a default causing debt payments to speed up.
Additionally, the rating agency said the college is exposed to credit risk through its insurer National, which is rated Baa1.
If National’s rating slips below Baa3, Bank of America has the option to purchase the bonds and remove the insurer. And if the bonds cannot be remarketed, the bank could demand repayment of the bonds within eight months of the tender offer.
Moody’s said St. Mary’s had limited funds last year to handle a rapid repayment of the bonds.
St. Mary’s also has an agreement with its conduit issuer to keep its unrestricted net assets to debt ratio of at least 0.9 times. The college did not meet this requirement in 2009 or 2010 but did comply within a 60-day window. St. Mary’s management is expecting to fall below the requirement based on fiscal 2011 numbers but to again jump the hurdle within the widow of time.
If the college fails to meet the requirements with CEFA, Moody’s said it must either put up collateral of receive a waiver.
St. Mary also has an interest rate swap agreement tied to the bonds with the Bank of New York Mellon. The college pays a fixed rate of 3.546% and receives 60.10% of the London Interbank Offered Rate plus 15 basis points. At its current rating, the college must post collateral if the mark-to-market value of the swap exceeds $5 million.
During fiscal 2011, St. Mary’s has had to post collateral that peaked at $11 million in September. As of the end of July, it had to post $6.9 million, according to Moody’s.
The rating agency also noted that the college is heavily invested in equities with 32% of its endowment in domestic stocks and 32% in international equities as of the end of April.
“Any significant stock market volatility could further strain the college’s net assets, causing potential future breaches of the LOC and bond covenants,” Moody’s said.
Michell said the school monitors its endowment portfolio risks on a monthly basis to make sure that it doesn’t threaten compliance with credit covenants.
