Standard & Poor's dropped the rating on Rutgers University's general obligation debt to AA-minus from AA, citing risks associated with the planned merger with University of Medicine & Dentistry of New Jersey.

S&P expects Rutgers to have $1.7 billion in outstanding debt after the merger is completed on July 1. This includes the sale of an $878 million bond planned for June 12 or 13, of which $733.4 million will be refunding.

The downgrade reflects Rutgers' assumption of approximately 72% of the assets and related liabilities of UMDNJ, S&P said Tuesday. Moody's Investors Service cut Rutgers long-term rating to Aa3 from Aa2 on Friday.

After the absorption of UMDNJ, Rutgers will have increased operational, financial, and credit risk, S&P said.

Previously Rutgers' involvement in the health sciences had been limited to a pharmacy and nursing school and a genetics program. With the absorption of much of UMDNJ, Rutgers is taking steps to take over most of New Jersey's medical education programs, S&P credit analyst Ken Rodgers said. With three weeks to go before the merger, Rutgers still has not named about a dozen senior leaders who would oversee the transition, Rodgers said. He estimated the one-time costs of melding UMDNJ's institutions with those of Rutgers would be $75 million over three years.

The state act that dictated Rutgers absorption of most of UMDNJ prohibits Rutgers from laying off any employees or changing their benefits for the first fiscal year, which starts on July 1.

"While we expect Rutgers student demand to remain strong we also believe that there isn't likely to be any meaningful improvement in key financial resource metrics such as adjusted unrestrained net assets to operating expenses or adjusted unrestricted net assets to debt in the next two years," Rogers wrote in a statement explaining S&P's negative outlook on the debt.

Rutgers spokesman E. J. Miranda responded in a written statement saying, "Rutgers University continues to enjoy one of the strongest bond ratings of any public institution in New Jersey. This reflects Rutgers' underlying strengths as the state's flagship public university, as well as the new opportunities that will be created by Rutgers' impending integration with most of the schools, centers and institutes that make up the University of Medicine and Dentistry of New Jersey."

He continued, "As we have stated repeatedly, the university and its financial advisers have long anticipated that integration with UMDNJ could lead to a short-term adjustment in Rutgers' bond rating. We certainly expected that combining the relatively low-rated UMDNJ debt (BBB+) with the Rutgers debt would have a slightly negative effect on our entire credit profile. This short-term adjustment is well within the range of our projections, and we continue to expect that the financial impact will be insignificant in the current climate of historically low interest rates."

S&P's rating change is on Rutgers' long-term debt. The rating company kept Rutgers' short-term debt at A-1-plus.

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