Moody's Investors Service has downgraded the District of Columbia revenue bonds (the Howard University issue) Series 2011A and Series 2011B (taxable) to Baa1 from A3, concluding the review that was initiated on July 8, 2013.

The downgrade is driven by pressure on all of the university's major revenue sources.

The negative outlook reflects an aggressive fiscal year 2014 budget that may prove difficult to implement in light of pressure on hospital operations, continuing soft enrollment, and a slow start to implementing planned efficiencies. It also reflects renewal risk associated with a revolving line of credit upon which the university relies for liquidity.

Howard University operates in a challenging operating environment. It is a private university, but is heavily supported by the U.S. (Aaa stable) government. It owns and operates a hospital that serves as the safety net hospital for the university's immediate neighborhood in Washington, D.C., but does not receive direct local support. The hospital has been a drag on the university's financial condition and, in Fiscal Year (FY) 2013, the hospital experienced a sharp decline in admissions and a shortfall of $17 million in revenue from hospital operations.

The downgrade of Howard University's rating to Baa1 reflects this loss of patient volume and revenue. It also reflects a marked drop in enrollment in Fall 2012 and cuts in direct appropriations from the federal government. At the same time, fundraising is weak. Operations for FY 2013 were only positive due to nonrecurring financial solutions that kept the university from posting an operating loss.

The negative outlook is predicated on continuing challenges. The university's FY 2014 budget, while balanced may be difficult to achieve as initiatives to lower payroll and other costs may prove increasingly difficult. At this time, the university has solicited proposals for another party to manage, joint venture, or buy the hospital. The outcome of this initiative could result in separation of the hospital from the university allowing the university to cut its losses, but the ability to find an appropriate partner and the willingness of the university to make difficult choices regarding its hospital and longstanding clinical care operation remain uncertain. In addition, the $135 million multi-bank credit agreement upon which the university relies for liquidity is due to expire in June 2014.

The rating benefits from the university's solid reputation as a comprehensive, research-intensive Historically Black College & University with consistent and meaningful direct annual support from the U.S. government. Other strengths include over $500 million in total cash and investments and fairly liquid investments translating to five months cash on hand in addition to the $135 million working capital line. The university's operating cash-flow margin of approximately 10% in FY 2013 provided over three times estimated coverage of debt service.

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