CHICAGO – The University of Chicago took a hit from Standard & Poor's amid balance-sheet pressure and planned deficits.
S&P downgraded the private university to AA-minus from AA, citing a growing debt burden to fund a $1.5 billion capital plan and a programming strategy that calls for deliberate deficits through fiscal 2018.
The university carries an AA-plus rating from Fitch Ratings, which affirmed the rating and stable outlook on Tuesday, and an Aa2 rating from Moody's Investors Service which had cut its rating one level in 2014.
"The lowered ratings reflect our view of the recent and expected performance of the university's financial profile," said Standard & Poor's analyst Jessica Matsumori, who also noted that the analysis reflects an updated methodology on not-for-profit public and private colleges and universities published earlier this year. At the lower level, a stable outlook is assigned.
The university benefits from "exceptional student demand" and an "impressive market position and fundraising" and international reputation, said the report, published late Tuesday. The university has more than 13,000 students and an endowment of $7.24 billion. The university has a $4.5 billion capital campaign underway and has raised $2.8 billion so far.
The university's strengths are hurt by its persistent operating deficits expected to continue until 2018 and a high debt burden that will see further growing in fiscal 2017 when the school is planning on another $100 million of borrowing, the report said.
"The Board of Trustees sees the university's investment in academic eminence as one of our chief priorities and responsibilities. In recent years, we have continued to make investments in the ambitious academic objectives articulated by our faculty, deans, provost and president. Our equally ambitious fundraising efforts are being realized, with Fiscal Year 2015 being the most successful fundraising year in the university's history," Board of Trustees chairman Joseph Neubauer said in a statement. "Our balance sheet remains strong, and we have increased liquidity and reduced risk in the endowment as we continue to pursue administrative efficiency and cost containment."
"We believe the rating has upward potential in the medium to longer term if the university achieves the goals laid out in its financial framework and its financial profile improves to levels that are more consistent with a higher rating," the S&P report said.
The university, founded in 1890, is in Chicago's Hyde Park neighborhood south of downtown.
Challenges include its significant exposure to the healthcare sector as 41.3% of its revenues come from its medical center or other healthcare-related sources. The school's maximum annual debt service burden represents 6% of 2015 expenses.
The university has more than $3 billion of debt outstanding, including $2 billion of long term tax-exempt bonds, $1 billion of taxable debt, and $400 million of floating-rate debt.
The S&P and Fitch rating reports come ahead of the university's remarketing next month of a portion of its 2001 bonds for another one-year term.
"Rating stability depends on University of Chicago's ability to sustain recent operating improvement and return to a breakeven level of performance as planned by fiscal 2018, while at the same time successfully managing a sizeable capital plan and preserving balance sheet resources," Fitch wrote.
