SAN FRANCISCO - Moody's Investors Service has downgraded the rating on Mills College in Oakland, Calif. to Baa3 from Baa2, citing continued deficit operations.

The downgrade applies to $31 million of debt issued by the independent liberal arts and sciences college.

"The downgrade to Baa3 reflects Mills College's continued deficit operations, which will be increasingly difficult to balance given the college's fundamentally challenged student market with volatile enrollment, stagnant net tuition per student and weak matriculation of incoming students," Moody's analysts said in a report released Nov. 26.

The rating also reflects the college's thin unrestricted liquidity available to cover operations, at about 2.5 months of monthly day's cash on hand for fiscal year 2014. The college relies on elevated endowment draws to fund debt service and operations.

Offsetting these factors and keeping the rating at Baa3 are a healthy overall financial cushion to debt and operations for the rating category, a conservative debt structure, and historically strong fundraising.

Moody's gives a negative outlook to the rating, reflecting an expectation that the college will remain challenged to improve operating performance over the next three years, given a lower than expected entering class for Fall 2014.

"Deterioration of liquidity, either as a result of weaker operations or investment losses would result in further credit deterioration," analysts said. "A restructuring or refunding of any portion of debt that includes disadvantageous terms and conditions for rated debt could cause further negative rating action."

The San Francisco Bay Area school is an undergraduate women's college, with graduate programs for women and men. Undergraduate enrollment in 2013 was 997, and postgraduate enrollment was 611.

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