University Dropped to A3

Moody’s Investors Service last week downgraded Ohio Northern University’s $80 million of debt to A3 from A2 and warned of further action by assigning a negative outlook as the school struggles with investment losses and enrollment.

ONU’s debt is sold through the Ohio Higher Education Facility Commission.

“The downgrade is primarily driven by a decline in the university’s balance sheet cushion for outstanding debt and annual operations following recent investment losses coupled with the fall 2009 student deposits tracking behind fall 2008 comparable levels,” Moody’s analysts wrote.

Analysts also are concerned about a financial covenant in the university’s letter of credit reimbursement agreement with JPMorgan Chase Bank NA. The bank provides a LOC on the school’s $34.9 million of 2008 debt.

Ohio Northern could face immediate repayment of any draws on the liquidity facility if it violates a covenant in the reimbursement agreement related to the school’s financials.

“Moody’s does not believe ONU will meet the covenant as of May 31, 2009” due to investment declines, the agency said. JPMorgan has indicated that it intends to amend the covenant so that violation of the covenant would only be an event of default and allow for acceleration of the variable-rate debt and not immediate repayment. However, analysts remain concerned because an accelerated repayment schedule would also strain the school’s liquidity.

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