Cash-flow struggles bring downgrade to New Jersey's Montclair State

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A tough cash-flow environment triggered a one-notch downgrade for Montclair State University in New Jersey.

Moody’s Investors Service lowered its ratings on Montclair State’s roughly $409 million of outstanding revenue bonds to A2 from A1 Monday, citing the public university’s weaker funding levels while it tackles capital projects. The bonds, which were issued through the New Jersey Educational Facilities Authority, were revised to stable from negative at the new rating.

“The downgrade to A2 reflects MSU's thinner operating performance, which is expected to be sustained, and some decline in liquidity as the university continues to fund capital investments,” said Moody’s analyst Mary Cooney in her report. “Softening net tuition revenue growth, with a price-sensitive student population, and flat state support from A3-rated New Jersey, combined with rising compensation costs, limit prospects for a return to more robust cash flows.”

Cooney noted that Montclair State has undergone strong strategic positioning from investing more than $600 million toward capital improvements since 2009 along with an additional $300 million in public-private partnerships that included $211 million for a 2,000-unit housing and dining hall. She said the campus infrastructure enhancements along with programmatic investments have yielded enrollment gains and improved brand recognition.

Cooney noted that the stable outlook reflects expectations of continuing steady enrollment with cash flow margins to meet two times debt service coverage. She said Moody’s also bases the stable outlook on expectations that the school will issue no new debt and return to reserve growth beginning in the 2020 fiscal year after capital improvements are finalized.

“While softening, liquidity and annual financial performance are expected to remain consistent with A2 level credit quality,” said Cooney. “With historically modest fundraising and lower operating cash flows, we expect limited improvement in overall wealth levels over the next two to three years.”

Montclair State is New Jersey’s second-largest university with 18,037 full-time students enrolled in the fall 2017 semester. The school recorded operating revenues of $412 million in the 2017 fiscal year, according to Moody’s.

“Although our rating has been downgraded, Moody's has issued a ‘stable’ outlook and Montclair State will continue to build on the momentum it has created over the past two decades,” said a university spokesperson in a statement. “The University has made enormous progress in improving its academic programs, its facilities and scholarship assistance for students to make it one of the most affordable and accessible public institutions in the state.”

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Ratings Higher education bonds New Jersey Educational Facilities Authority New Jersey