Michigan State's gymnastics sex abuse scandal triggers a downgrade

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Michigan State University's long-term rating was dealt a one-notch downgrade by Moody’s Investors Service Thursday as the university faces mounting financial risk from the growing number of lawsuits related to sexual abuse claims made by victims of former university employee and Olympic gymnastics doctor Larry Nassar.

The rating agency downgraded the university to Aa2, affecting approximately $975 million of rated debt. The outlook is negative.

“We expect operating performance to thin over the short-term, with ongoing legal costs and university investment into enhanced risk management and governance issues increasing costs,” Moody’s said. “Timing of the ultimate resolution of outstanding claims and litigation, which is currently in mediation, is uncertain, but the financial ramification could be material.”

The negative outlook reflects the uncertainty over how fast MSU can resolve the claims and what the magnitude of the financial and reputational risk will be to the university.

Moody’s said the scrutiny of senior leadership and management that “could ultimately require years to resolve” was yet another factor that posed as a credit risk for the school.

An estimated 250 women accused Nassar of sexual abuse earlier this year, which resulted in a guilty plea and maximum 175-year prison sentence.

Michigan State employed Nassar as a physician and associate professor from 1996 to 2016. The university is now facing intense scrutiny for neglecting to act on allegations against Nassar, the earliest of which emerged as far back as 1997 and extend to his work with the U.S. gymnastics team.

The scandal widened when Michigan Attorney General Bill Schuette last week filed charges against William Strampel, who was dean of MSU's College of Osteopathic Medicine for 15 years. Strampel, who was Nassar's boss, is accused of sexual misconduct.

More than 250 women are suing MSU and USA Gymnastics in federal court, saying the organizations didn't do enough to protect them.

The school is seeking to have those lawsuits dismissed based on, among other things, full immunity from all state law claims and lack of standing for federal law claims.

The package of bills aimed at preventing sexual assaults and approved by the Michigan Senate on March 14 could strip MSU's ability to defend itself. The bills expand the statute of limitations to file lawsuits stemming from past sex crimes and lifts governmental immunity protections for public institutions.

Interim MSU President John Engler said the university is legally prohibited from using endowment funds to cover lawsuit payments and said that "students and taxpayers" could be on the hook for some of the charges.

MSU has an undisclosed amount of insurance coverage, as well as approximately $1.5 billion of unrestricted monthly liquidity as of June 30, 2017, which could be used toward legal fees, restitution and other unforeseen costs, according to Moody’s.

The university has started closed-door mediation sessions with lawyers for Nassar's victims. The next sessions are scheduled for May 14 and 15.

MSU is also facing an investigation by the Michigan attorney general, as well as at least two each from congressional committees and the U.S. Department of Education. Michigan lawmakers and the NCAA are also looking into how the university handled the abuse claims. The university has denied it violated any NCAA rules related to its handling of Nassar.

S&P Global Ratings revised its outlook on the university to negative from stable over the Nassar scandal in early April. S&P rates Michigan State’s debt AA-plus.

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