CHICAGO — As it works to reduce its reliance on endowment draws and loans to cover operations, the Illinois Institute of Technology held on to its investment-grade rating from Moody’s Investors Service on Friday, when the agency removed the credit from its watchlist and affirmed its Baa3 rating.

The Chicago-based college is not out of the woods yet, however, as Moody’s assigned a negative outlook due to ongoing fiscal challenges.

The outlook “reflects Moody’s concern of the university’s imbalanced operating performance with planned endowment draws above the industry average until fiscal year 2012, as well as continued reliance on bank lines of credit and loans from its endowment,” analysts wrote.

The action follows Fitch Ratings’ move earlier this month knocking IIT’s $190 million of direct debt into junk-bond territory by dunking the credit four notches to BB-minus from BBB. Moody’s also counts privatized student housing and an affiliated research institute’s bonds as direct debt, bringing total debt levels to $232.4 million. The university issues its debt through the Illinois Finance Authority.

While continuing to make all its debt service payments, IIT has struggled for the last five years with operating deficits that have prompted it to dip more deeply into its endowment than most other higher education institutions and tap lines of credit to supplement operating revenue.

The school is highly leveraged, with expendable resources of just $1 million and limited liquidity of $39 million in cash and investments providing “very thin” coverage of 62 days of liquidity, according to analysts. It drew $17 against a $20.2 million line of credit with Harris Bank in fiscal 2010. Earlier this month, it had no outstanding balance but expects to draw on the line against before the end of its fiscal year.

The school faces further challenges from its reliance 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, and international competition.

IIT’s tuition has risen nearly 46% over the last five fiscal years to $15,850, but remains low compared to other institutions. Applications have also been down over the last five years although overall enrollment is up. “The Baa3 rating is based upon the university’s prolonged weak financial position despite a solid operating base and a unique market position,” Moody’s wrote.

In its favor, the school has no plans to issue new debt, as its leaders have focused their attention on balancing operations. With that goal in mind, it has cut costs and adopted more conservative budget practices.

IIT enjoys healthy donation levels for its rating, with gifts averaging $18.6 million annually. It also has a unique market position with graduate students making up 65% of its enrollment. Overall enrollment grew by 2.5% to 7,265 students last fall.

The Board of Trustees recently approved a fiscal 2012 budget that includes an endowment spending rate of 5% for operations and an allocation from the endowment for the capital campaign, and anticipates a return to balanced operations. The university holds a $189 million endowment, from which it drew $19 million in fiscal 2011.

IIT operates five campuses in Chicago and its suburbs offering programs in architecture, law, business, design, and engineering. Its Chicago campus was designed by famed architect Mies van der Rohe.

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