BRADENTON, Fla. - A Florida university official said the institution was not aware of the potential credit impact of a direct bank loan that has now triggered a second negative rating action.
Fitch Ratings placed its A-plus ratings on Florida Gulf Coast University's parking and housing revenue bonds on watch negative Thursday, citing the terms of an $11.9 million direct bank loan that could result in acceleration of all parity debt, including bond payments, if a default occurred.
Fitch followed Standard & Poor's, which revised its rating outlook to negative Aug. 21 citing the same bank loan, while affirming its A ratings on FGCU's parking system bonds and A-minus ratings on the housing bonds.
Both rating agencies have now warned that absent a change in the terms of the loan, FGCU's ratings could suffer multi-notch downgrades.
The university, based in Fort Myers about 28 miles north of Naples on the state's southwest coast, had $225 million of outstanding student housing and parking revenue bonds as of June 30, 2013.
The bonds were issued by the Florida Gulf Coast University Financing Corp.
Curtis Bullock, executive director of the FGCU Financing Corp., said in an email Friday that he had no comment on the rating agency actions.
The corporation is working with the bank "on a solution that will be acceptable to all parties," he added.
"We were not aware of the potential impact" the loan could have on the bond ratings, he said.
Since at least 2011, both Fitch and S&P have warned issuers about risks that could be associated with the increasing popularity of alternative financings, such as direct bank loans.
Both raters have asked issuers to disclose loan documents to determine if there are negative impacts that warrant rating downgrades.
Fitch said it recently reviewed the terms of FGCU Financing Corp.'s direct bank placement with STI Institutional & Government Inc., a subsidiary of SunTrust Bank Inc. Proceeds were used to refund certain outstanding bonds. The loan was issued July 1, 2013.
The loan's terms contain cross-default provisions that allow for the potential acceleration of all parity debt under the trust indenture in the event of certain non-major, non-credit related covenant violations, said Fitch analyst Nancy Faingar Moore.
A violation could trigger a default if not remedied within as few as five business days, and default could occur for failing to provide notice within three days about any change in material fact or circumstance, she added.
"The rating watch negative reflects Fitch's concern that a non-credit covenant violation under the loan agreement could trigger an acceleration of all parity debt, exposing the university to contingent liquidity and repayment risk," Moore said. "Fitch views the university's current liquidity position as insufficient to cover the acceleration of all parity debt under the trust indenture."
A multi-notch rating downgrade could result if the loan is not amended, Fitch said, while also acknowledging that FGCU is discussing the loan with STI and expects a resolution within six months.
"Fitch was recently told by university management and bond counsel that the bank is reviewing its policy and potential language changes," said Moore.
There is no way to know how prevalent bank loans are, but it is likely that some have not been reported, said a financial advisor from a national firm.
Such loans are not required to be disclosed by Securities and Exchange Commission Rule 15c2-12, the continuing disclosure agreement, despite the fact that many are on par with an issuer's outstanding debt, Fitch noted in an October 2011 report.
"Unfortunately, there are some issuers who do not use an FA or use an FA that is not as familiar with bank loans and these type of provisions, so the included terms and conditions cause heartburn" that can potentially impact bond ratings, the financial advisor said.
Many issuers have qualified financial advisors who are aware of problems that can arise from bank loan covenants, and work with the issuer and bond counsel to remove those provisions from loan documents, he said. Those issuers will also reject bank proposals containing such covenants.
"Most of the banks who are active in the governmental lending arena are familiar with our concerns, so it isn't as much of an issue with them," the FA said. "With local banks, we sometimes need to provide some education on why the bank requested provisions do not work for the deal due to the existing covenants on the outstanding debt issues."