Standard & Poor's Ratings Services said it lowered its long-term and underlying rating on the District of Columbia's $293 million revenue bonds issued for Howard University to BBB-plus from A-minus.
The outlook is stable. At the same time, Standard & Poor's lowered its stand-alone credit profile on the university to BBB-plus from A-minus.
"We lowered the rating as a result of management turnover, fiscal operating pressures that has eroded financial margins, and our expectation of an operating deficit for fiscal year-end 2014," said Standard & Poor's credit analyst Laura Kuffler-Macdonald. Howard's president retired in October amid friction with the board and most of the key senior positions are filled on an interim basis. The university's financial margins have been eroding since 2012 and for the first half of fiscal 2014, Howard has an operating deficit of $18 million. The 2014 budget called for a year-end surplus of $15 million.
"However, given the first-half operating results, we believe that the university is not likely to meet the revised budget despite management implementing cost reductions," Kuffler-Macdonald added.
Howard, founded in 1867, is a comprehensive private university located in Washington, D.C. The university offers a broad range of undergraduate, graduate, and professional programs, including law, business, medicine, dentistry, pharmacy, engineering, and architecture. Howard also has a school of divinity.
The university owns and operates a teaching hospital, which in 2013 represented about 30% of consolidated operating revenues. Howard is unique as one of only two nonmilitary schools in the U.S. that are federally chartered and receive an ongoing direct federal appropriation.
As mandated by a 1928 congressional act, only an act of Congress can terminate Howard's annual appropriation. The university has a small research presence, largely related to its medical school, and for the fiscal year ending June 30, 2013, recorded $35 million of research expenses.
The stable outlook reflects the expectation that Howard will balance operations in 2014 on a cash flow basis (excluding depreciation expense) and see at least break-even operating results in fiscal 2015 on a full accrual basis. At the same time, the rating agency expects liquidity ratios to remain stable.
A negative rating action could occur during the two-year outlook period should Howard not improve operating performance, financial resources deteriorate, or the university issue additional debt without an improvement in operating margins or liquidity. An upgrade during the outlook period is unlikely given the low financial resource ratios and the operating challenges.
