S&P Global Ratings lowered its outlook on Michigan State University to negative from stable because of the continuing fallout from the sexual abuse scandal involving former university and Olympic gymnastics doctor Larry Nassar.

It's the second rating action stemming from the sex abuse cases, and the strain may worsen as the criminal scope of the scandal has widened to include another university official.

Thursday's S&P action affects roughly $1.16 billion of AA-plus rated debt.

John Engler, then president of Business Roundtable, right, speaks in New York, U.S., on Tuesday, Oct. 25, 2016. The former Michigan governor was named interim president of Michigan State University in 2018.
Michigan State University's interim president, John Engler, said he is pleased that S&P kept the university's AA-plus rating despite assiging a negative outlook. Bloomberg News

“The negative outlook reflects our view of risk management issues stemming from recent state and national inquiries related to historical Title IX concerns on campus, which have resulted in numerable changes to senior leadership," said S&P Global Ratings credit analyst Ashley Ramchandani.

“We believe that there may be material effects on the overall enrollment and demand profile of MSU during the upcoming enrollment cycle, the degree to which currently remains indeterminate,” Ramchandani said. “"The negative outlook further reflects our view of the potential effects of undefined financial obligations due to ongoing litigation.”

Nassar was sentenced to 40 to 175 years in prison after more than 150 women and girls testified that he sexually abused them over two decades. Michigan State employed Nassar as a physician and associate professor from 1996 to 2016. The university is now facing intense scrutiny for neglecting to act on allegations against Nassar, the earliest of which emerged as far back as 1997 and extend to his work with the U.S. national gymnastics team.

The scandal widened when Michigan Attorney General Bill Schuette last week filed charges against William Strampel, who was dean of the College of Osteopathic Medicine for 15 years. Strampel, Nassar's former boss, is accused of sexual misconduct.

Ramchandani said that the negative outlook further reflects the potential additional litigation that could arise from a package of bills passed by the Michigan Senate last month. The legislation extends the statute of limitations on filing claims and restricts the school’s ability to claim governmental immunity in lawsuits.

“We believe the long-term rating, at this time, remains appropriate given the university's historically strong market position, supporting its healthy demand profile and relatively stable enrollment,” S&P wrote. “In addition, we believe the long-term rating reflects the school's consistently positive financial operating performance and abundant financial resource metrics.”

S&P said it could consider a downgrade if MSU’s sees significant decline in its enrollment profile or demand metrics or adjusted operating performance materially deteriorates, or if its available resource ratios weaken relative to the rating category and peers. “As further information becomes available regarding the extent of negative effects on the profile of MSU, we could consider a multi-notch downgrade,” S&P wrote.

“MSU is pleased that S&P affirmed our AA+ long-term bond rating, which is the second-highest rating you can receive,” interim MSU President John Engler said in a statement. “We were not surprised by the outlook change, as the higher education industry in general is going through a leaner outlook. The decline in high school graduates, coupled with national policies that have impacted international students' abilities to seek a western education, are seen across the board, and MSU is no different in those challenges.”

Moody’s placed the university’s Aa1 rating under review for downgrade in January after Nassar's conviction.

More than 250 women are suing MSU and USA Gymnastics in federal court, saying the organizations didn't do enough to protect them.

The school is seeking to have those lawsuits dismissed based on, among other things, full immunity from all state law claims and lack of standing for federal law claims.

The package of bills aimed at preventing sexual assaults approved by the Michigan Senate on March 14 could strip MSU's ability to defend itself. The bills expand the statute of limitations to file lawsuits stemming from past sex crimes and lifts governmental immunity protections for public institutions.

"A number of the bills have nothing to do with supporting the survivors at all," Engler said in a testimony before the Senate Appropriations Subcommittee on Higher Education on March 15. "They're all about changing the leverage at the table with negotiations," he said.

"The idea that people were coming forward for 20 years and nothing was done to stop this monster, I don't think that's the Legislature's fault," Sen. Curtis Hertel, D-East Lansing said in support of the bills. "Yes, there are going to be some MSU financial costs to that. I think we all realize that. But I think withholding justice from people is never going to be the right answer."

Engler said the university is legally prohibited from using endowment funds to cover lawsuit payments and said that "students and taxpayers" could be on the hook for some of the charges.

MSU has an undisclosed amount of insurance coverage, as well as approximately $1.5 billion of unrestricted monthly liquidity as of June 30, 2017, which could be used towards legal fees, restitution, and other unforeseen costs, according to Moody’s.

Engler told lawmakers his goal is to reach a settlement with Nassar's victims before the end of the semester.

MSU is also facing an investigation by the Michigan attorney general, as well as at least two each from congressional committees and the U.S. Department of Education. Michigan lawmakers and the NCAA are also looking into how the university handled the abuse claims.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.