CHICAGO - Standard & Poor's Jan. 30 revised its outlook to negative from stable on the University of Chicago's AA rating.
The revision was the school's second dose of negative credit news this week noting poorer-than-expected fiscal performance, planned deficits, and future borrowing plans.
Standard & Poor's move followed Moody's Investors Service's action Jan. 28 to revise the outlook on the prominent school's Aa1 rating to negative.
"The revised outlook reflects our view of the university's worse-than-anticipated fiscal 2013 financial performance, combined with its recently adopted strategic plan, which calls for deliberate deficits through fiscal 2018," said Standard & Poor's analyst Jessica Matsumori.
The university's plans for an additional $300 million to $400 million of debt in fiscal 2015 and then another $300 million to $500 million through fiscal 2018 for planned projects also contributed to the outlook shift. The university has $2.6 billion of outstanding of debt when its commercial paper is fully utilized.
"We recognize that management and the board adopted the strategic plan after significant deliberation and that the initiatives of this plan will help better position the university, but the prolonged deficits and additional leverage produce credit risks that may result in a credit profile more in line with the AA-minus rating within the outlook period," Matsumori said.
Moody's action was driven by similar factors as well as pressures on the university's hospital system, which is rated Aa3 and has seen thinner operating margins driven by transfers to the university.
"The revision to the negative outlook is driven by weaker university operating performance that is expected to continue despite strong gift revenues, resulting in consolidated thinner cash flow in the face of rising debt service from the university and medical center's substantial debt burden," Moody's said. "The demand on cash flow will be exacerbated with an expected debt issuance within the calendar year."
The more than 130-year-old university located on Chicago's south side has a student body of 15,000. The credit benefits from a still strong balance sheet, good unrestricted liquidity, strong and leading research position, and strong fundraising profile.
The university's leadership has also shown success in guiding its strategic plan to date, raising the school's academic profile and fundraising with three-year annual average gift revenues of $310 million including $362 million alone in fiscal 2013.
Research grants totaled $449 million in fiscal 2013 and $1.2 billion in research activity was conducted by its two federal research laboratories it manages -- Fermi National Accelerator Laboratory and the Argonne National Laboratory.
In a statement after the Moody's outlook change, the university's chief financial officer, Nim Chinniah, stressed the school's still high grade ratings.
"The university remains among the most highly rated institutions of higher education in the country, reflecting its underlying financial strength, its international academic reputation, and its significant research presence," the statement said.
Fitch Ratings on Tuesday affirmed the school's AA-plus rating and stable outlook.
