Northwestern returns to bond market without triple-A ratings
Northwestern University’s $300 million taxable issue will come to market as soon as Wednesday with a little less luster than its previous deals due to the loss of its triple-A ratings.
Ahead of the sale, Fitch Ratings and S&P Global Ratings downgraded the private Big Ten school to AA-plus from AAA. Moody’s Investors Service affirmed its Aa1 rating after having downgraded it from Aaa last October.
“The revised rating reflects Northwestern's softer overall financial results for fiscal 2018 and 2019, including supplemental endowment draws to achieve those results, and expected losses likely for fiscal years 2020 and 2021 with the latter losses largely due to the impact of the COVID-19 epidemic," said S&P analyst Ken Rodgers.
The university's balance sheet metrics, while strong, are now more in line with peers at the current rating reflecting in part a 25% increase in debt in fiscal year 2018 to support capital spending, S&P said.
The downgrade "reflects Northwestern's persistent operating pressures heading into the coronavirus pandemic. However, the strength of this rating reflects NU's exceptional demand profile, strong research platform, robust financial profile, and excellent fundraising track record in support of strategic and capital investment needs,” Fitch wrote.
The university is stressing with investors its still-high ratings and positive comments about the university’s overall credit profile in rating reports “which will help the university to weather the operating uncertainties related to the coronavirus,” the school said in a statement. “Just as the revised rating from Moody’s had a minimal impact on the university’s day-to-day operations and our ability to borrow, we expect the revised Standard & Poor’s and Fitch ratings will have a negligible impact.”
The university said the taxable structure best aligns its plans to refinance outstanding commercial paper program to provide future flexibility. Goldman Sachs, JPMorgan and Morgan Stanley are joint bookrunners.
The university warns of the uncertain impact of the pandemic on its enrollment, housing, student demand, revenue and the potential for lawsuits other universities have faced due to the shift to remote learning. The university adopted remote learning in March and that will continue for summer classes.
“The full impact on Northwestern’s finances and operations cannot be determined at this time” but the school outlines in its offering statement actions taken aimed at mitigating the blow and helping it manage through the use of credit lines to bolster liquidity and cost saving measures.
The school, which recently announced a $90 million deficit in its current budget, has temporarily furloughed 250 staff members, temporarily suspended pension contributions, cut compensation for executive staff, and suspended planned pay increases, and is deferring some capital spending and has temporary hiring restrictions in place.
COVID-19 is referenced in several sections in the offering statement including investment considerations and is referenced as a driving factor in several university decisions on credit lines and its endowment. NU has elected not to accept federal stimulus funds under the Coronavirus Aid, Relief, and Economic Security ACT funds.
The university had $1.28 billion of daily liquidity at the end of March. It had $750 million in working lines of credit. It opened March with an $80 million draw and took another $450 million draw March 20 to hold in cash reserves due to uncertainty over the impact of COVID-19. Last month, the board raised the line limit to $1 billion.
The endowment’s market value has dropped due to the pandemic’s impact on investments prompting a temporary increase in the spending rate that was 4.6% in 2019. The university had about $2 billion of debt and $11.2 billion in cash and investments at the close of 2019.
The university had made gains in restoring its operational balance but the pandemic will set back those strides. “Expenses and revenue losses associated with the coronavirus will deteriorate performance in fiscal 2020 and fiscal 2021,” Moody’s said.
The private university founded in 1851 operates campuses in Evanston, Chicago and Qatar and is among the top-ranked academic universities nationally and internationally. Its health system is top-ranked also but a separate credit. It has 21,000 full time students.
The university’s balance sheet remains in sturdy condition to manage through the pandemic’s impact on operations and the uncertainty on revenue as it remains unclear whether campus life will be restored in the fall.
“The stable outlook reflects the university's impressive student demand, operations that remain under pressure, very healthy philanthropic support and a balance sheet that should enable the university to manage through difficult times from the COVID-19 pandemic,” S&P said.
“Given a very strong financial profile, the 'AA+' rating is largely resilient in a more severe downside scenario, which assumes a slower economic recovery and prolonged or recurring coronavirus-related disruptions such as extended lockdowns and campus closures beyond fall 2020,” Fitch wrote.
Moody’s noted that a large portion of the university's wealth is unrestricted providing strong support in times of operating stress. Fundraising was also described as an additional credit strength, with three-year average gift revenue of nearly $345 million. Operating revenues total $2.5 billion with diversity among sources so that the largest stream accounts for under 30%.
The university relies on tuition, fees, research funding, annual unrestricted fundraising including net assets released from restriction, and investment returns.