Rutgers, The State University of New Jersey, had its rating cut to Aa3 from Aa2 at Moody’s Investors Service, which cited a planned merger with the University of Medicine and Dentistry of New Jersey.

The downgrade affects $1.7 billion in outstanding debt and an $878 million bond that Moody’s said Rutgers plans to sell..

In response, Rutgers said that it had expected the planned July 1 merger with nine of the 11 operating divisions of the University of Medicine and Dentistry of New Jersey would lead to the downgrade.

Moody’s  said it will be difficult and time consuming to merge two organizations with different cultures and systems.The merger will leave Rutgers will the relatively narrow liquidity of 120 monthly days of cash on hand on a pro forma basis,  wrote Moody’s vice presidents Edith Behr and Karen Kedem.

Rutgers has a highly leveraged balance sheet and will assume about 70% of UMDNJ’s outstanding debt, the analysts said.

The combined university is expected to shoulder additional nonrecurring costs related to the merger, they wrote. It will take two years to merge the operations and start to gain the financial benefits, they wrote.

Moody’s has a negative outlook on the Rutgers University debt.

“Rutgers University has always enjoyed one of the strongest bond ratings of any public institution in the state and with today’s action maintains a leadership position in New Jersey,” the Rutgers media office staff said. “In the current climate of historically low interest rates, we expect the financial impact of this adjustment to be insignificant and well within the range of our expectations.

“The university and its financial advisers have long anticipated that the complex challenges surrounding integration with UMDNJ could lead to a short-term adjustment in Rutgers’ bond rating,” the Rutgers staff continued. “Certainly combining the relatively low-rated UMDNJ debt (Baa1) with the Rutgers debt was expected to have a slightly negative affect on the entire credit profile.”

Standard & Poor’s rates the Rutgers debt AA. In February S&P put a negative outlook on the debt, citing the planned merger with UMDNJ.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.