How two Ohio community colleges landed underlying junk ratings

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The underlying ratings of two Ohio community colleges were dropped to junk in a series of rating actions by Moody’s Investors Service.

The colleges, however, benefit from a state enhancement program which Moody’s affirmed at Aa2 in the rating actions published late Monday.

The state’s credit enhancement program allows the Chancellor of the Ohio Department of Higher Education to redirect the college's state aid in the form of state share of instruction to the bond trustee to pay debt service if there is a shortfall in general receipts revenue.

In all, Moody's took rating action on four Ohio community colleges, impacting $63 million of debt.

All of the colleges have a minimal amount of debt burden but they also face the challenge of declining enrollment that will continue to impact their revenue raising ability, the rating agency said.

Terra State Community College saw a three notch downgrade to the speculative grade of Ba2 from Baa2 and it was assigned a negative outlook. The small community college in rural northwest Ohio that serves Sandusky, Ottawa, and Seneca counties at its campus in Fremont has posted three years of insufficient debt service coverage and material decline in reserves.

In fiscal 2017, the college had an operating base of $15 million and enrolled 1,251 students. The college has a modest debt burden of $5.5 million but expects to borrow an additional $1.5 million for capital expenditures.

Declining enrollment will continue to challenge the college’s ability to raise revenue. "The negative outlook reflects our expectation that a material improvement in operations is unlikely over the next one to two years given the college's limited ability to materially reduce expenses while net tuition revenues continue to decline and state appropriations are static at best," Moody's said.

Zane State College saw a one notch downgrade that put in junk territory. It was cut to Ba1 from Baa3 with a negative outlook.

The college’s declining tuition revenue has contributed to negative operating cash flow in three of the last five years, according to Moody’s. Between 2013 and 2017, enrollment declined by nearly 37%. The college is expecting to miss its budget for fiscal 2018 by $1 million, a substantial amount given just $4.2 million of remaining liquidity as of fiscal 2017. The college has $7.2 million in debt outstanding as of fiscal 2017.

Southern State Community College was downgraded two notches to Baa3 from Baa1 with a negative outlook. The college, which has four locations in southern Ohio, is also suffering from sustained decline in tuition revenue. The college has roughly $15 million of outstanding debt as of fiscal 2017. “The college is relatively small with only $18 million in operating revenue and, despite cuts in expenses, operating margins remain negative,” Moody’s said.

Moody's also revised its outlook on the A3-rated Cincinnati State Tech and Community College to negative from stable citing the college’s weakening financial position. Roughly $35 million of debt outstanding is affected. The college had fall 2017 enrollment of approximately 8,807 students, down from 11,167 in 2014.

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