Moody's Investors Service last week affirmed Central College's low investment-grade underlying rating of Baa3 as it warned that a downgrade could loom due to challenges tied to thin liquidity coverage of its floating-rate debt.

The rating agency's decision to shift its outlook to negative from stable on the underlying credit affects $23.5 million of debt issued through the Iowa Finance Authority in 2008.

"The negative outlook reflects the college's limited monthly liquidity relative to its variable-rate demand obligations and high exposure to the volatility of the stock markets within its unrestricted monthly liquidity," analysts wrote.

Central College has achieved improvements in its operating performance through more conservative budgeting practices but faces a challenging student market, debt structure risk including bond covenant breaches, and limited financial flexibility.

The bonds carry an Aa1 rating based on the joint support of the college and a letter of credit from Wells Fargo Bank NA. The bank is rated Aa2 but is on watchlist for possible downgrade.

Central College has a new senior management team, including a president who has proposed a three-year plan for strategic renewal. A new chief financial officer will start next year.

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