BRADENTON, Fla. – West Virginia’s Mountain State University lost its investment-grade rating after announcing that it may lose its accreditation.
Moody’s Investors Service dropped the private, nonprofit university to B1 from Baa3 on Wednesday.
The action came after the university announced that the Chicago-based Higher Learning Commission of the North Central Association plans to revoke its accreditation on Aug. 27.
Moody’s also placed the lower rating on review for further downgrade.
The junk rating affects $5.6 million of debt rated by Moody’s, which was issued in 2004 by the city of Beckley and the Raleigh County Building Commission. MSU also has about $10 million of long-term bank debt.
Officials at the university were not available Friday to comment on the downgrade, according to MSU spokesman Andrew Wessels.
“MSU fully intends to fulfill its bond and loan obligations,” Wessels said, adding that the university will file a notice of intent to appeal the accreditation decision by July 23. “MSU remains accredited and will remain accredited throughout the appeal process.”
According to the Higher Learning Commission, the appeal process typically takes 10 to 16 weeks.
Even if the appeal is successful, “the damage to the university’s reputation will affect revenue for the near term and create recruiting and retention challenges,” said Moody’s analyst Dennis Gephardt.
The ongoing review of MSU’s credit will focus on the appeal, fall 2012 enrollment, cash balances and the potential for acceleration of bank debt, Gephardt said.
The covenants for the bank loan agreement with City National Bank require that MSU maintain accreditation, or the full amount of the loan will be accelerated, and to keep at least $10.8 million in cash or federally backed securities as collateral with the bank.
“We view the collateralized position provided for the City National Bank loan on the $11 million of collateral to be a disadvantage for the Series 2004 bondholders,” Gephardt said.
A year ago, MSU notified bondholders that the accreditation commission had placed the university on notice to correct a series of deficiencies, according to the Municipal Services Rulemaking Board’s EMMA system.
Earlier this year, the university told bondholders that it also lost a separate accreditation to issue bachelor’s degrees for its nursing program.
Despite these problems, the university’s bonds continue to trade infrequently and at par or higher.
In January, a customer bought $20,000 of bonds maturing in 2023 for 102 cents on the dollar at an interest rate of 4.5%.
Mountain State University was founded in 1933. The main campus is in downtown Beckley, about 50 miles south of the capital of Charleston.
The university has nearly 4,000 full-time students. It also has branch campuses in Martinsburg, W.Va., Center Township, Pa., Mooresville, N.C., and Orlando, Fla.
MSU is the second private, nonprofit college that has run into problems with its accreditation problems in the Southeast recently.
Last year, Lambuth University in Tennessee lost its accreditation and filed for bankruptcy.