Moody's Investor's Service downgraded bonds from the University of Puerto Rico two notches deeper into speculative grade.
Moody's dropped the institution's University System Revenue Bonds to Ba3 from Ba1 on Monday night. It also downgraded the 2000 series A educational facilities revenue bonds to B1 from Ba2.
The downgrades affect $561 million. Moody's has a negative outlook on the ratings.
The university relies on the Puerto Rico government for 67% of its operating revenue, which is much higher than the public university median of 26%, Moody's analyst Diane Viacava said. The downgrade of Puerto Rico's general obligation rating to Ba2 from Baa3 on Feb. 7 triggered Moody's downgrade of the university, Viacava said.
The university has weak liquidity with $99 million of unrestricted monthly liquidity, equivalent to 32 monthly days in fiscal year 2012, Viacava said. The university has relied on the Government Development Bank for liquidity. Moody's downgraded the bank two notches to Ba2 on Feb. 7.
The university-run medical center has an accumulated deficit it is trying to work through.
Two-thirds of university students receive Pell Grants, which makes it exposed to possible federal reductions in the program.
The university also has rising unfunded pension and other post-employment benefits liabilities. They totaled about $1.8 billion in fiscal year 2012.
Finally, university enrollment has been stagnant. Growth may be challenging given the emigration of the island's young professionals and shrinking high school graduation classes.
On the plus side, the university has recently produced improved cash flow, with a 10.8% operating cash flow margin in fiscal year 2012 that is up from 4.4% in fiscal year 2010.
The university's medical center had an operating cash flow margin of 10.7% in fiscal year 2012.
Finally, government spending for the university is legislatively mandated as a percentage of general fund revenues.
The negative outlook "reflects both the commonwealth's negative outlook and concerns about pressures on enrollment and pledged revenues, failure to grow balance sheet liquidity and uncertainty about ability to maintain positive hospital operating performance," Viacava said.
In related news, Standard & Poor's revised its outlook on its BBB rating of Sacred Heart University in Puerto Rico to negative from neutral on Wednesday afternoon. Sacred Heart is a private non-profit university.
