Seton Hall University downgraded ahead of bond sale

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Seton Hall University plans to sell $103 million of bonds as it grapples with near-term fiscal challenges that triggered a rating downgrade.

Moody’s Investors Service lowered the South Orange, New Jersey-based school to Baa1 from A3 Wednesday, citing the school’s constrained financial flexibility because of a rising debt burden. The outlook is stable.

The Catholic college is slated to hit the market in June with a negotiated offering featuring roughly $54 million of tax-exempt revenue bonds and about $49 million of federally taxable revenue bonds to be sold through the New Jersey Educational Facilities Authority.

Seton Hall University in South Orange, New Jersey was downgraded one notch by Moody's Investors Service to Baa1 from A3 prior to a planned $103 million bond sale scheduled for June.

Moody’s analyst Pranav Sharma said Seton Hall’s new borrowing will increase its annual debt service costs relative to cash flow and reserves. The South Orange, New Jersey-based university has $168 million of outstanding debt prior to the planned bonding, according to Moody’s.

Seton Hall will use proceeds from the borrowing to finance multiple capital projects including construction of a new residence hall and athletic facility renovations. The school, which enrolled 8,600 students in fall 2019, is also planning to refund outstanding bonds issued in 2011 and 2013.

“I am happy to see, despite economic uncertainty and the current state of flux for higher education nationally, some schools, like Seton Hall University, are moving forward with transactions,” NJEFA board member Louis Rodriguez said during the May 19 meeting. “Seton Hall is taking advantage of low interest rates where possible and continuing to make important investments in campus upgrades and infrastructure.”

The bonds will be payable from all legally available university funds. Seton Hall has not created a specific revenue source pledge for the debt, according to Moody’s.

“Our new rating and stable outlook continue to reflect the University’s secure financial position,” Seton Hall CFO Stephen Graham said in a statement. “Based on current market conditions, this rating will have minimal impact on the pricing of bonds issued to Seton Hall."

Sharma noted that the downgrade also reflects Seton Hall’s high dependence on tuition revenues and “historically modest fundraising” while operating in a “price sensitive” higher education market. Seton Hall like other colleges across the country was forced to transition from in-person to virtual learning midway through the spring semester due to the COVID-19 pandemic, which resulted in lost revenue from prorated housing refunds.

Bank of America was tapped to lead the negotiated deal with Drexel Hamilton, Stern Brothers and UBS acting as co-managers, according to a resolution approved at the May 19 NJEFA meeting. McManimon, Scotland & Baumann, LLC is bond counsel for the upcoming sale.

Sharma said Seton Hall's stable outlook reflect expectations that the school will "successfully manage through challenging credit conditions" the next two years and sustain operating cash flow margins of at least 10%. The stable outlook also incorporates assumptions of classes resuming on campus this fall.

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Downgrades Higher education bonds New Jersey Educational Facilities Authority New Jersey
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