Moody's Investors Service Wednesday downgraded Massachusetts' Deerfield Academy to Aa1from Aaa in anticipation of the private secondary school's significant increase in debtlevels following a $48.5 million bond issue expected next week.
The upcoming offering, which will be sold by the Massachusetts Development FinanceAgency, will increase debt levels by 350%, while the total financial resources of theschool have only grown by 37% since 1997. Following this issuance, the highly selectivepreparatory school will have $62 million in debt outstanding. This increase, more thananything else, is what spurred the downgrade, said Moody's John Nelson.
"Their core fundamentals have not weakened in any way," he said. "This is because of theshift in the debt load rather than the deterioration of their financial position."
The MDFA will issue the $27.5 million in Series 2003A fixed-rate bonds and $21 millionof Series 2003B auction-rate bonds on June 19. This represents the first variable-rateexposure in the academy's debt portfolio.
Citigroup Global Markets Inc. in the lead underwriter on the sale.
Bond proceeds will be used to finance the construction of a new math, science, andtechnology building, and will also fund the demolition of the current building and theinstallation of temporary classroom space.
The school is the second private educational institution in Massachusetts to lose itscoveted Aaa rating from Moody's this year for over-leveraging its portfolio. In March,Williams College was downgraded to Aa1 by the ratings agency after significantlyincreasing its debt levels.
Moody's expects Deerfield's strong fund-raising history to continue contributing toresource growth and capital investment. The academy recently completed a fund-raisingcampaign, garnering $145 million and exceeding its five-year goal of $125 million. Theschool expects to use some of these funds to pay back its loan as pledges come in.Beyond the upcoming issue, Deerfield does not expect to issue debt for at least the nextthree years, nor is it expecting to engage in large amounts of capital investment beyondmaintenance and repairs.
The independent secondary-school market in New England, and throughout the rest of thecountry, faces many of the same challenges of private universities nationwide, includinga decline in investment markets and the slowdown in private donations.
According to Standard & Poor's Mary Peloquin-Dodd, all private schools face thechallenge of an increasingly savvy student population who want more and betterfacilities on campus with little or no increase in tuition.
But for the wealthier, more established private schools, among them Deerfield, PhillipsAndover Academy, the Groton School, and Phillips Exeter Academy, the market remainshealthy.
"Student demand is continuing to skyrocket," said Elizabeth Veasey of Moody's. "It'sreally a self-selecting group of families who are sending their students to these top-tier schools."
Standard & Poor's affirmed its AAA rating for Deerfield last month. Fitch Ratings doesnot rate the school.
