BRADENTON, Fla. — Moody's Investors Service downgraded the revenue bond rating of Alabama State University to A3 from A2, and said the rating could drop further when the final results of a forensic audit are known.

Moody's also lowered the lease revenue rating to Baa1 from A3 on Oct. 18.

The actions affect $233.1 million of debt, and the ratings remains under review for potential further downgrade.

"The rating action reflects a combination of the deterioration of the university's financial profile, uncertainty surrounding the university's relationship with the state following the governor's initiation of a forensic investigation in January 2013, and the diverted attention that this investigation poses to the university's board and management team," said analyst Caitlin Bertha.

Gov. Robert Bentley, who is president of the ASU board, hired Forensic Strategic Solutions Inc. to do a financial assessment. Recent preliminary results show "obfuscation by the university throughout the investigation and multiple acts of potential fraud, waste, and nepotism by the board of the university," according to Moody's. "The university disagrees with these findings and is working to modify any misinformation it perceives in the report."

If the allegations are found to be true, and if weak governance and management as well as poor oversight and disclosure are unveiled, there could be further negative pressure on the rating, Bertha said.

Operations have been pressured in recent years due to declining state support and management's decision to use reserves rather than implement expense reductions, said Moody's. In fiscal 2012, the university had a 4.6% operating deficit and operating cash flow was insufficient to fully cover debt service requirements.

"Management expects future operations to improve, although we believe there is some risk that the current scrutiny and negative publicity could negatively impact enrollment and state support, both key revenue drivers," Bertha said.

The A3 rating is supported by ASU's market niche as a historically black university with recent enrollment stability, combined with moderate reserve levels that provide some operating cushion, Moody's said, noting that the university is relatively highly leveraged with debt to revenue of 1.94 times.

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.