Potential liabilities from the Jerry Sandusky child molestation case and cover-up prompted Standard & Poor’s to revise its outlook to negative from stable on Pennsylvania State University’s long-term bond rating.
“What we have is uncertainty associated with pending litigation and related expenses regarding the Sandusky matter versus a pretty substantial set of financial resources,” the rating agency’s Boston-based credit analyst, Blake Cullimore, said in an interview Tuesday.
Late Monday, Standard & Poor’s announced the revision, while maintaining its AA rating in the school’s Series 2002 through 2010 bonds. It also affirmed its A-1+ short-term rating on the university’s Series 2009B variable-rate demand bonds, now supported by self-liquidity, and AA/A-1 rating on the Series 2002 VRDBs based on its joint criteria.
Sandusky, 68, a former Penn State assistant football coach, was sentenced on Oct. 9 to 30 to 60 years in prison after a jury convicted him on 45 counts of sexually molesting 10 boys over a 15-year period.
The scandal surfaced last fall and resulted in the firing of university president Graham Spanier and longtime head coach Joe Paterno, and the imposition by the National Collegiate Athletic Association of a $60 million fine against the school and a four-year ban on appearing in bowl games. Paterno died in January.
According to Cullimore, Penn State’s current credit metrics remain consistent with the AA category but the potential magnitude of financial liability could lead to credit deterioration over the next two years.
“This school has a national profile and its credit quality is anchored by its broad enrollment draw, above average operating margins, and strong research, and that’s a real positive,” Cullimore said. “All the metrics, outside of the Sandusky matter, range from strong to stable. That’s what the numbers are telling us.”
As of June 30, Penn State’s $1.1 billion of debt is primarily fixed rate, except for $174 million in variable-rate (16%) debt including the Series 2009B and 2002 bonds, which have not been swapped.
Penn State, whose preliminary total enrollment for fall 2012 is 84,578, has the authorization for now to issue nearly $300 million in additional debt and may issue $50 million to $100 million in 2013. It has a $130 million provision for Federal Accounting Standards Board changes to covert capital leases.
“Based on financial resources and the current debt burden, we believe that Penn State has the capacity for the additional expected debt but we recognize that funding of future nondebt liabilities could reduce debt capacity,” the Standard & Poor’s report said.
The university, according to the report, expects Sandusky-related settlements but according to Standard & Poor’s has been unable to provide settlement cost estimates because of variables.
They include the trials of former athletic director Tim Curley and former vice president Gary Schultz on perjury charges, and levels of insurance coverage.
The Curley and Schultz trials are expected to begin January in Harrisburg. Penn State on Monday said it would not renew the contract of Curley, who has been on paid leave since the scandal broke.
Standard & Poor’s, while calling Penn State’s insurance coverage comprehensive, warned that the amount of such coverage could pose a credit risk if additional insurers reduce or deny coverage.
In July, the university’s general liability insurer since 1976, the Pennsylvania Manufacturers’ Association, filed a motion in Philadelphia’s Court of Common Pleas to deny coverage to Penn State because the school knew of Sandusky’s activities.
