Michigan State University took a one-notch rating hit as it geared up to issue bonds to help cover $500 million in settlement expenses stemming from former university doctor Larry Nassar's sexual abuse of hundreds of girls and young women.
S&P Global Ratings downgraded the general revenue bond rating to AA on Wednesday, warning the increased debt load “will considerably compress the university’s available resource ratios.”
The rating agency also lowered the ratings on the university’s outstanding variable-rate bonds by one notch to AA/A-1-plus and affirmed the top A-1-plus short-term rating on MSU's tax-exempt and taxable commercial paper notes.
The university plans to issue roughly $784 million in bonds. About $450 million of the bonds will be used for the settlement and $334 million will be used for new capital projects and to refund $51 million of outstanding commercial paper.
The rating is not yet out of the woods as S&P assigned the university a negative outlook. S&P remains concerned that the school could be on the hook for an even greater sum of money if its insurance carriers don’t pay.
In May, Moody’s Investors Service downgraded MSU one notch to Aa2 and it, too, has assigned the university a negative outlook.
S&P said in its report: “The negative outlook reflects the uncertainty related to the legal settlement and fulfillment of contractual obligations of the university's various insurance carriers could require additional financial commitment, which is somewhat mitigated by the involvement of MSU's insurance carriers in the mediation process.”
Members of the MSU board of trustees voted last month to authorize the sale of bonds to pay for the $500 million settlement. The trustees also gave Vice President and General Counsel Robert Young the go-ahead to finalize the settlement.
MSU spokesperson Emily Guerrant said at the time that the school expected to issue the bonds within 30 days after the settlement agreement is finalized with plans to do bond outreach during July.
Melody Kindraka, a university spokeswoman, said Thursday: "Bonds are the quickest, most expedient way to raise money without a direct impact on programs and services. We understand this will impact our credit ratings but so far we remain in the AA investment-grade range."
She said the university currently tentatively anticipates beginning the bond pricing process on Aug. 1. The bonds will not be sold until the settlement is finalized by all parties. The financial advisor is Blue Rose Capital Advisors. The underwriters will include Bank of America Merrill Lynch, Citigroup Global Markets, JPMorgan, Morgan Stanley, and RBC Capital Markets.
The university is still in negotiations with its insurers for reimbursement based on the liability policies. MSU expects to initially pay down its bond debt with money from the insurers.
Investment income, as well as other revenue from investments, could also be used to pay down the debt.
Beyond its concerns over settlement costs, S&P said the negative outlook also reflects its view of MSU’s senior leadership's “current risk management and balancing of stakeholders' interests as current engagement of the senior leadership team has demonstrated limited capacity to quell current campus unrest.”
John Engler, the state's former Republican governor, was appointed by the board of trustees as interim president after the university’s longtime president, Lou Anna Simon, resigned amid the sex-abuse scandal at the school. Engler has faced calls for his resignation in recent weeks over comments he made about a victim of the sex abuse in an email.
The board has set a timeline to select a new university president by June 2019.
Market participants have said that MSU's solid standing with investors given its overall credit strengths is likely to outweigh any distaste over the use of proceeds.
“The most important factor are the security features,” Paul Mansour, head of municipal research at investment management firm Conning, wrote in an email. “These are parity bonds issued by a solid credit. Thus I do not expect much incremental difficulty or price concessions in selling these bonds.”
MSU’s challenge will be to prove to investors it can cover the additional leverage the debt creates.
“I think there are investors that will be concerned about the 50% jump in leverage that doesn’t help finance any physical assets, others that question whether or not additional downgrades are looming as MSU is confronted with escalating debt service costs,” Tom Schuette, co-head of investment research and strategy at Gurtin Municipal Bond Management, wrote in an email.
S&P said that a downgrade could occur during the two-year outlook period should the university experience significant deterioration in its financial profile or if it issues additional debt without commensurate growth in available resources.
The rating could also face downward pressure if the school experiences sustained declines in enrollment or weaker demand. S&P said it could also consider a lower rating if the senior leadership team fails to experience successful transition over time.
Lawsuits against the school by victims claimed that MSU neglected to act on allegations against Nassar, the earliest of which emerged as far back as 1997 and extended to his work with the U.S. gymnastics team. More than 300 girls and women sued the university over its handling of Nassar. He was sentenced in January to between 40 and 175 years in state prison after pleading guilty to counts of criminal sexual conduct.