CHICAGO — The Illinois Institute of Technology is in danger of losing its investment-grade level rating from Moody’s Investors Service as it struggles with operating deficits that have forced draws on its endowment and bank lines to cover debt service and other obligations.

Moody’s late last week lowered the rating on the private Chicago university’s $190 million of direct debt to Baa3 — the lowest investment-grade level — from Baa2 and placed the rating on watch for another possible downgrade.

The institute accesses the market through the Illinois Finance Authority.

“The rating has been placed on watchlist for further possible downgrade, reflecting concerns of continued deep operating losses and weak cash flow resulting in a further drain on liquidity, forcing greater reliance on bank lines and borrowings against the endowment to fund its obligations, including debt service,” analysts wrote.

The watchlist analysis is expected to be completed over the next 90 days. Analysts plan to further review IIT’s liquidity and cash-flow projections, its turnaround plan, and documents tied to bank lines and letters of credit supporting variable-rate debt of its related organizations.

Analysts also will be looking at the college’s market position, pricing strategy and current and planned enrollment efforts.

The university reported $39 million in cash and investments available to cover 62 days of operations.

To offset operating deficits over the last five years, it has used lines of credits to cover costs as well as draws on its endowment, including $25.3 million in fiscal 2010.

Additional draws to supplement operations are expected through fiscal 2012. The  has $179.6 million of unrestricted cash and investments compared to $249.4 of total long-term debt.

The institute, which had revenues of $213.5 million for fiscal 2009, faces bank exposure due to its use of $17 million against a $20 million Harris Bank line of credit and letters of credit for its 2002 privatized student housing bonds and its research institute’s 2004 bonds.

The housing and research institute bonds totaling about $42 million are not direct obligations of the university, but Moody’s said it considers them part of the school’s overall debt portfolio because of the strategic importance of projects they funded.

The university is highly reliant on international students who represent nearly 40% of its enrollment, leaving it vulnerable to fluctuations in the value of the dollar, the availability of visas for students, and international competition. Undergraduate admissions have dropped by more than 50% over the last five years. The school offers a low net tuition rate of $15,850 per student. It  has an enrollment of 7,265 students.

Moody’s noted that despite its struggles, IIT has made timely debt service payments. The institute’s credit strengths include healthy giving levels with gifts averaging $18.6 million from 2008 through 2010.

“Moody’s notes that the university’s ability to generate revenues through fundraising could improve its liquidity position and/or operating performance in coming years,” analysts wrote.

 The school plans to launch a capital campaign. No new debt issuance is planned as management remains focused on improving the balance sheet and leaders are in the second year of a three-year turnaround plan that relies on spending cuts and adopting more proactive budget strategies.

The school enjoys a unique market position, serving a primarily graduate student population with programs in architecture, law, business, design, and engineering.

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