Revenue struggles send a New Jersey Catholic college closer to junk

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Mounting debt and expenses amid a competitive higher education landscape have put Georgian Court University at risk of losing its investment grade rating.

Moody’s Investors Service revised its outlook for the small Catholic college’s Baa3 debt ratings to negative from stable Wednesday citing an operating deficit that grew to 7% in 2018 and failure covering debt service from operating cash flow. The revision applies to roughly $28 million of outstanding revenue bonds the Lakewood, New Jersey-based school issued through the New Jersey Educational Facilities Authority.


“The revision of the outlook to negative is based on market difficulties that have contributed to weak revenue growth and deteriorating financial performance,” Moody’s analyst Pranav Sharma wrote. “The negative outlook reflects expectations of continued pressure on operating performance and enrollment over the near term.”

S&P Global Ratings rates GCU’s debt at an equivalent BBB-minus. S&P affirmed its stable outlook on April 4 citing expectations that the school will maintain enrollment and have adequate resources to combat deficits in the next two years.

Sharma noted that while GCU has grown its enrollment in recent years, the school has faced increasing operating deficits stemming from increases in financial aid and initial expenses related to new programs. The school does however have “very good” liquidity for a near-junk rating relative to its debt and expenses, providing it time to address the fiscal challenges, according to Sharma. The university is projecting to reduce deficits starting in the 2019 fiscal year and generate positive performance staring in 2020.

“The university's relatively small scale of $43 million in operating revenue with a high reliance on student charges in a challenging market environment and modest fundraising may make sustained financial improvement difficult,” said Sharma. “The university has limited resources for future capital investment.”

GCU enrolled 2.458 students in the fall 2018 semester, a 2.8% increase from 2017. The university had $31.9 million of total debt outstanding as of June 30, 2018, including bonds and capital leases, according to S&P.

Joseph R. Marbach, president of GCU, said a new strategic plan launched late last year is aimed at growing revenue through the launching of two new graduate programs offering doctoral degree in school psychology and a master's degree in higher education and student affairs. The school is also rolling out new undergraduate offerings in computer information systems and is experiencing growth among health care majors such as nursing.

“We are disappointed in Moody's decision to shift its outlook for Georgian Court University, especially given that Standard & Poor's recently affirmed the university as stable,” Marbach said in a statement. “These ratings come as our enrollment grows and as we strengthen our spendable financial resources. We are also actively reducing expenses and focusing on revenue generation activities to balance the institution's budget."

GCU’s series 2017 G and 2017 H bonds are a general obligation of the university payable from all legally available funds and do not have a debt service reserve fund. Sharma said GCU should have sufficient resources for operations, maintenance and loan payments because of the university’s ability to set tuition, fees, rentals and other charges. The school also has granted a mortgage on certain facilities to bondholders, according to Moody's.

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Ratings Higher education bonds New Jersey Educational Facilities Authority New Jersey
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