Moody’s Investors Service this week revised its outlook to negative from stable on DePauw University’s A2 credit due to operating deficits. It has about $100 million of rated debt sold through the Indiana Finance Authority and the Indiana Educational Facilities Authority.

Analysts attributed the stable outlook to a 12% operating deficit for fiscal 2008 and a high reliance on gifts to fund ongoing operations that, combined with investment losses during fiscal 2009, have caused balance-sheet deterioration. DePauw also experienced some volatility in enrollment in 2008 but has shown improvement for fall 2009, Moody’s said.

“The weak performance is largely due to a failure to fully budget for depreciation, elevated spending from the endowment, and high reliance on varying cash flows from unrestricted gifts to fund ongoing operation,” analysts wrote.

DePauw’s challenges include a competitive market environment that has led to the school discounting tuition. The current net tuition per student is $13,341 compared to the median of $19,059 for small, private A-rated universities.

Its strengths include a stable market position, noteworthy music programs and opportunities for study abroad. It enrolls highly qualified students with moderately selective admissions. It has a three-year average of $33 million in gift revenue, which compares favorably to a median of $11 million for peer institutions.

DePauw, which has 2,265 students, expects to refinance $20 million borrowed through a line of credit in an upcoming sale. It will also convert $8.7 million of floating-rate debt to a fixed rate.

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