Hartwick College in Oneonta, N.Y. was downgraded into junk territory by Moody’s Investors Service Wednesday, due largely to struggles with tuition revenue growth in a competitive higher education landscape.

The private liberal arts school’s long-term bond rating was cut one notch by Moody’s to Ba1 from Baa3.

“The downgrade incorporates pressured operations that we expect to persist over the near-term,” Moody’s analyst Christopher Collins wrote in report Wednesday. “While the college has demonstrated good expense management, its limited scale impedes its ability to implement spending reductions without impairing its competitive position. “

Moody's Investors Service downgraded Hartwick College. Bloomberg

Hartwick may face a further downgrade if it fails to meet budgeted enrollment targets, experiences a material decline in reserves and shows an inability to grow operating revenue from student tuition,Collins said. The school enrolled 1,375 students in fall 2016 with operating revenue of roughly $46 million, according to Moody’s.

“The negative outlook reflects our expectations of continued enrollment and net tuition revenue pressures that will translate into softening operations and debt service coverage,” said Collins. “Restoring fiscal balance will be challenging over the near-term given the small operating base and weak revenue growth outlook.”

Collins noted that on the favorable side, Hartwick has “healthy unrestricted liquidity” and consistent support from donors. The school has no borrowing plans and “a relatively conservative debt structure”, according to Collins.

Hartwick issued $39 million of series 2015a general obligation bonds through the Ostego County Capital Resource Corporation that are backed by any legally available moneys of the college and further secured by an interest in unrestricted gross revenues. There is no debt service reserve fund for the bonds, which mature in 2045.

Collins said a benefit to bondholders is Hartwick’s guaranty agreement prohibiting issuing additional debt if its credit rating is lower than investment grade. The college has also pledged in the agreement to have pro-forma maximum annual debt service of at least 120% for two of the most recent audited fiscal years if it wants to borrow for financing a residence hall.

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