Deficit woes could cost New Jersey City University investment-grade rating
Mounting deficits following an aggressive capital spending campaign drove New Jersey City University to the edge of junk status ahead of a $52 million revenue refunding bond sale.
Moody’s Investors Service lowered NJCU two notches to Baa3 from Baa1 and retained its negative outlook on the credit last week, citing worsening fiscal conditions at the regional public university amid a challenging higher education climate. The action affects around $141 million of outstanding debt and roughly $52 million of revenue refunding bonds the Jersey City-based school is scheduled to sell through the New Jersey Educational Facilities Authority.
“The downgrade to Baa3 and maintenance of the negative outlook reflect NJCU's ongoing operating deficits that continue to weaken liquidity,” Moody’s analyst Craig Sabatini wrote in an April 29 report. “The negative outlook reflects the challenging business conditions which will make it difficult for the university to restore fiscal balance and improve liquidity over the next several years absent a material change in financial strategy.”
The NJCU borrowing will feature tax-exempt and taxable securities. The bonds have an expected final maturity in 2045 and will refund the college’s series 2007F, series 2008F, series 2010F, series 2010G and 2015A bonds.
The negotiated deal is slated for sale in early May, with Morgan Stanley as senior manager and Raymond James as co-manager, according to a resolution approved at the March 24 NJEFA meeting. Hilltop Securities will serve as financial advisor, according to Moody's.
Sabatini noted NJCU's operating deficits have escalated each of the past five years while the school tackled major investments in programs and facilities. The college had a 10% budget gap in 2019 and monthly liquidity dipped to under $14 million in 2019, compared to $45 million during the 2015 fiscal year.
NJCU's operating revenues also fell short of covering debt service payments the past four years, according to Moody's. The university avoided default during this period by using other available funds since no debt service reserve fund exists.
Savings from the planned refunding will provide some near-term budgetary relief while the university addresses its fiscal obstacles, according to Sabatini. University officials told Moody's the refinancing coupled with $8.6 million of aid from the federal Coronavirus Aid, Relief, and Economic Security Act will offer some liquidity for the 2020 fiscal year.
The COVID-19 outbreak was also a factor in NJCU’s downgrade, since the health crisis creates potential enrollment pressures in fall 2020, and perhaps a smaller freshman class and lower retention levels. The university is limited in terms of tuition flexibility since it enrolls many first-generation college students from poorer families, Sabatini said.
NJCU could face another downgrade if it experiences ongoing operating deficits and continued declines in monthly liquidity in fiscal year 2021 without prospects for a reversal, according to Moody’s. A decrease in state support that is not offset by other revenue sources could also lower the university’s debt into junk territory.
The NJCU press office did not immediately respond to a request for comment. The college has averaged 6,763 full-time students over the past five years with more than 80% of those at the undergraduate level.