The University of Louisville’s rating outlook was changed to developing by Moody’s Investors Service after Kentucky Gov. Matt Bevin dismissed the board of trustees on June 17.

BRADENTON, Fla. - The University of Louisville's outlook was changed to developing after Moody's Investors Service found that actions by Kentucky's governor in dismissing the board of trustees raised uncertainty about governance at the institution.

Moody's announced the outlook change Thursday while affirming the university's Aa3 underlying ratings on $178 million of outstanding rated debt.

The University of Louisville Foundation's outlook also was changed to developing as Moody's affirmed its Aa3 ratings on $200 million of debt.

"The revision of the rating outlook to developing reflects uncertainty as to the resolution of recent governance and management changes, which have prevented the adoption of a fiscal 2017 budget and other business decisions," said Moody's analyst Mary Kay Cooney. "In the near-term, these events divert time and attention of senior leadership as well as create reputational risks."

Moody's announced the outlook changes two days after Kentucky Attorney General Andy Beshear filed a lawsuit against Gov. Matt Bevin for removing the university's board of trustees on June 17, the same day he removed state pension board members and restructured the agency.

In both cases, Bevin used an executive order and in both cases Beshear's suit calls the actions a violation of the state's constitution. Beshear is seeking an order blocking Bevin's removal of the boards.

Bevin said he dismissed the university's board because it had become "operationally dysfunctional," and that precluded members from being effective in performing fiduciary duties.

Moody's said the University of Louisville's relatively narrow operating performance and weak liquidity could pose challenges if it were to encounter short-term disruptions.

Over time, Cooney said, governance and management changes could be a positive credit factor if a more stable and functional structure is developed.

Bevin dismissed the 20 university board members and asked the Kentucky Council on Postsecondary Education to suggest replacements for 10 members that he will appoint. The remaining slots will be filled by the faculty, staff, and student body.

The governor created an interim university board of trustees appointing six members to oversee the college. They can take action on university business.

The University of Louisville's credit strengths include good brand recognition, which contributed to a 22% increase in net tuition revenue between fiscal years 2011 and 2015, and an absence of defined benefit pension exposure, Moody's said.

The university also enjoys a strong affiliation with KentuckyOne Health and Catholic Health Initiatives, which drives revenue growth and contributes to academic and research profile.

Moody's said the university's bonds could be downgraded if the new board and leadership are unable to take over in a timely manner, and that leads to fiscal instability and insufficient cash flow to cover annual debt service.

The university's fiscal year begins July 1.

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.