Standard & Poor's Ratings Services said it lowered to BBB-minus from BBB its underlying rating on Washington Higher Education Facilities Authority's series 2006 bonds, issued for Pacific Lutheran University.
At the same time, it lowered to BBB-minus from BBB the long-term rating on the authority's series 2014 revenue bonds, issued for PLU. The outlook is negative.
"The downgrade reflects our view of PLU's weakened overall financial profile, characterized by continued operating deficits on a generally accepted accounting principle basis, as well as a decrease in financial resource ratios, particularly expendable resources relative to debt," said Standard & Poor's credit analyst Margaret McNamara. "The downgrade also reflects several years of enrollment and demand pressure, shown by decreasing headcount and freshman applications."
The university was not in compliance with its covenanted liquidity ratio related to the series 2006 bonds in fiscal 2014 and it does not expect to be in compliance for fiscal 2015. According to bond documents that Standard & Poor's has reviewed, if the university is not compliant for two consecutive fiscal years, this will constitute an event of default under the loan agreement for the series 2006 bonds. If the violation continues for a period of 60 days after written notice has been given to the university, it could cause a full acceleration of the series 2006 bonds (about $54 million outstanding as of May 31, 2015), unless PLU is able to obtain a waiver from its bond insurer.
Management has indicated that it is seeking a waiver from the bond insurer; however, it cannot officially request the waiver until its fiscal 2015 audit is finalized, which it expects to occur in October 2015. If the waiver is not granted, the university has identified adequate potential liquidity sources to meet any acceleration demand.
