Sex abuse settlement lands Michigan State University on ratings watch

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Michigan State University’s lack of transparency over how it will foot a $500 million settlement arrangement with sex abuse victims of Larry Nassar landed it on S&P Global Ratings' CreditWatch with negative implications.

The action Thursday impacts S&P's MSU’s AA-plus general revenue bond rating.

The ratings agency also affirmed its A-1-plus short-term rating on MSU's tax-exempt and taxable commercial paper notes. The agency also affirmed the AA-plus/A-1-plus and AA-plus /A-1 ratings on the university's existing general revenue variable-rate demand bonds.

"The CreditWatch placement reflects our view of MSU's recently announced settlement …without clarification of source of funds or timing of disbursement," said S&P Global Ratings credit analyst Ashley Ramchandani in a statement.

Ramchandani said the settlement may negatively impact the university’s financial profile as well as university enrollment and overall institution reputation. “We will continue to monitor the impact of this action and anticipate updating the rating and outlook for MSU within the next 90 days," Ramchandani said.

S&P’s action follows Moody’s decision earlier this week to downgrade MSU one notch to Aa2. In April, S&P lowered its outlook on MSU's AA-plus rating to negative from stable citing similar concerns.

Under the MSU’s settlement in principle with victims of the former Michigan State team physician and associate professor, the university will pay $425 million to current claimants and $75 million will be set aside in a trust fund to protect any future claimants alleging sexual abuse by Nassar.

The lawsuits claimed that MSU neglected to act on allegations against Nassar, the earliest of which emerged as far back as 1997 and extend to his work with the U.S. gymnastics team. More than 250 women accused Nassar of sexual abuse. Nasser pleaded guilty to multiple counts in 2017 and received a prison sentence of up to 175 years.

The university did not disclose how it would pay for the settlement but interim MSU President John Engler has said in the past that MSU is legally prohibited from using endowment funds to cover lawsuit payments and said that he hoped insurance would cover at least some of the settlement costs.

S&P said that MSU is currently operating under a confidentiality order imposed by the judge associated with the settlement and contends that its insurance carriers participated in the mediation and expects them to fulfill their contractual obligations.

MSU has an undisclosed amount of insurance coverage, as well as approximately $1.5 billion of unrestricted monthly liquidity as of June 30, 2017, which could also be used toward legal fees, restitution and other unforeseen costs.

Engler has also said that "students and taxpayers" could be on the hook for some of the charges.

Michigan lawmakers have opposed the idea.

“I don’t know how a university with a larger rainy day fund than what we have could ask us to chip in especially when they created this problem,” said state House Speaker Tom Leonard, R-DeWitt.

House Minority Leader Sam Singh, D-East Lansing, said he is not in support of any increases in tuition for students.

The university has approximately $1.2 billion in outstanding debt including $180 million of outstanding commercial paper. The bonds and CP are secured by general revenues, which include tuition, auxiliary system revenue, unrestricted gifts and unrestricted investment income but exclude state appropriations. At the end of fiscal 2017, the university reported nearly $3.5 billion in total cash and investments.

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