CHICAGO — Fitch Ratings has stripped the Illinois Institute of Technology of its investment-grade rating and assigned a negative outlook to the school and its $190 million of outstanding revenue bonds, which were issued through the Illinois Finance Authority.
Fitch downgraded the Chicago-based university’s rating by four notches on Friday, lowering it to BB-minus from BBB. The agency also warned of the potential for further negative action due in part to the toll on its balance sheet of ongoing draws from its endowment to offset operating losses.
IIT’s fiscal struggles and inability to balance its operations with revenues on hand in recent years have prompted higher-than-expected draws on its endowment, including $25.3 million in 2010. Fitch is concerned that the school’s balance sheet is so stressed that its management faces a difficult task implementing turnaround strategies aimed at better aligning annual operating revenues with expenditures, even though it reports some progress on that front.
The management team is on track to bring its endowment withdrawal to a level allowed under existing policies in 2012.
“While Fitch views management’s decisive actions to correct the operating issues favorably, the excess draws, in combination with losses associated with investment in research ventures through the IIT Research Institute and general market losses, have critically depleted IIT’s financial resources,” Fitch wrote.
Moody’s Investors Service last December downgraded IIT’s rating to Baa3, the lowest investment grade level, and placed the rating on watchlist for possible downgrade due to its endowment draws and reliance on bank lines of credit to cover debt service and other obligations.
IIT’s cash and investments that are not permanently restricted have plummeted 95.3% over the past five years, with available funds representing only 3.2% of operating expenses and 3.5% of total debt, Fitch said. The institute has averaged a negative operating margin of 15.4% over the past five fiscal years, improving to only negative 7.1% with endowment support.
The 71-year-old private school’s enrollment continues to rise as its programs benefit from strong demand. Enrollment reached 7,774 last fall. Graduate students make up two-thirds. About 40% of its students come from outside the country.
IIT’s fiscal struggles prompted the U.S. Department of Education to allow its continued participation in the USDE student financial aid programs on a provisional basis for fall 2010 through 2012, adding to the school’s difficulties.
“Should the USDE take further action eliminating the eligibility of IIT students to participate in the SFA programs, the potential negative impact on enrollment could be significant, which could result in further negative rating actions,” Fitch warned.
IIT operates five campuses in Chicago and its suburbs. Its credit strengths include healthy giving levels, its unique market position, and serving a primarily graduate student population with programs in architecture, law, business, design, and engineering.