Standard & Poor's Ratings Services said it lowered its underlying rating on Southfield Economic Development Corp., Mich.'s variable-rate demand revenue bonds, issued for Lawrence Technological University, one notch to BB-plus from BBB-minus.
The outlook is stable.
The downgrade reflects Standard & Poor's opinion of the university's high bank-related or bank-supported debt, significant event-driven risk and potential liquidity exposure from the recent issuance of bank debt, and small full-accrual deficit in fiscal 2013.
"We believe that during the two year outlook period, the university's demand trends will likely remain stable and enrollment will likely remain close to current levels. We also expect balanced financial operations on a full accrual basis and the maintenance of current expendable resources. We believe the issuance of significant additional debt, especially if it increases the university's exposure to event driven risk; larger full accrual deficits; or significant decreases in net tuition revenue could lead to a negative rating action during the outlook period," said Standard & Poor's credit analyst Emily Avila. "Although unlikely within the next two years due to the university's exposure to significant event driven risk and insufficient liquid resources to meet a liquidity crunch, we could raise the rating if the university were to generate significant full accrual surpluses, if financial resource ratios were to improve sufficiently to become commensurate with the 'BBB' rating category, and if demand metrics were to continue to improve."
At the same time, Standard & Poor's affirmed its AA/A-1 joint-criteria rating on the bonds. The long-term rating component jointly reflects, assuming low correlation, the rating on the university and the rating on JPMorgan Chase Bank N.A., the letter of credit provider. The short-term rating reflects the liquidity provider's rating.
In Standard & Poor's opinion, the university has insufficient liquid resources to cover balance sheet debt in the event of payment acceleration, which is more reflective of a lower rating. The potential acceleration risk and insufficient liquid resources to meet a liquidity crunch resulted in, what the rating service views as, a weaker financial profile that it considers more commensurate with other BB-plus rated institutions. What Standard & Poor's considers the university's solid financial resources for the BB rating category, moderate pro forma maximum annual debt service debt, and record of stabilizing full-time-equivalent enrollment while improving the demand profile support the rating.
