Standard & Poor's Ratings Services said it lowered its rating on the Virginia College Building Authority's revenue bonds, issued for Regent University, to BBB from BBB-plus.
The outlook is negative.
"The lower rating reflects declines in liquidity and endowment coupled with increasing operating deficits, which management had hoped to control with enrollment and revenue growth," said Standard & Poor's credit analyst Stephen Infranco. "However, because of weaker-than-budgeted net tuition revenue and continued losses at The Founders Inn and Conference Center, the operating deficit more than doubled to $7.7 million in fiscal 2013."
Furthermore, Regent has reverted back to an aggressive endowment spending rate to balance operations and fund for strategic needs, which could put further stress on liquidity. Future ratings actions will hinge on management's ability to increase enrollment or offset some of the revenue shortfall with expense savings and limit the need for extraordinary endowment spending over the longer term.
The negative outlook reflects Regent's continued and growing operating losses and likelihood of increasing endowment draws to support operations in fiscal 2014. Furthermore, enrollment and revenue would need to rebound in fiscal 2014, as projected, or Regent's financial resources could decrease further due to continued extraordinary endowment spending, which is already affected by the board approved increased marketing investment.
Standard & Poor's could lower the rating further if one or more of the following occur, including operating deficits that are sustained at or increase beyond current levels, or if enrollment or financial resources decrease significantly. In addition, if liquidity becomes constrained due in part to the collateral pledge on the line of credit, it could lower that rating.
While management is projecting continued revenue pressure for fiscal 2014 that will likely result in deficit operating performance, expected cost containment measures could limit the downside variance. Regent also benefits from a solid level of financial resources for the current rating. S&P would consider an outlook revision to stable if Regent can limit operating losses to a manageable level for consecutive years, while maintaining financial resources at or above existing levels.
