Credit fallout remains after Michigan State's $500 million sex abuse settlement

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Michigan State University's $500 million settlement with victims of Larry Nassar leaves an open question: how will the university pay for it?

Wednesday’s settlement in principle with sex abuse victims of the former Michigan State team physician and associate professor removes some of the uncertainty around the financial impacts of the Nassar cases, said Susan Fitzgerald, an associate managing director at Moody’s Investors Service.

"The details of the funding sources and timing are not yet available,” Fitzgerald said. “Moreover, the university continues to face scrutiny from a number of parties, which will continue to be a credit challenge.”

The lawsuits claimed that MSU neglected to act on allegations against Nassar, the earliest of which emerged as far back as 1997 and extend to his work with the U.S. gymnastics team. Around 250 women accused Nassar of sexual abuse. Nasser pleaded guilty to multiple counts in 2017 and received a prison sentence of up to 175 years.

Under the terms of the settlement, the university will pay $425 million to current claimants and $75 million will be set aside in a trust fund to protect any future claimants alleging sexual abuse by Nassar.

The university did not disclose how it would pay for the settlement but interim MSU President John Engler has said in the past that MSU is legally prohibited from using endowment funds to cover lawsuit payments and said that he hoped insurance would cover at least some of the settlement costs.

Engler also said that "students and taxpayers" could be on the hook for some of the charges.

MSU has an undisclosed amount of insurance coverage, as well as approximately $1.5 billion of unrestricted monthly liquidity as of June 30, 2017, which could be used toward legal fees, restitution and other unforeseen costs, according to Moody’s.

“The state may make it hard for MSU to use either state aid or tuition to pay the settlement, and it’s reasonable that the school sees fewer alumni donations and student enrollment applications going forward, at least in the short term,” said Matt Fabian, a partner at Municipal Market Analytics.

From a performance perspective, Fabian said it’s likely that the scenario may lead to rating downgrades and/or spread widening. “Maybe more important is a likely pullback by some investors who simply don’t want to own this name anymore,” Fabian said.

Uncertainty over the risks the school faced from the Nassar fallout has already hurt MSU's ratings.

On May 3 Moody’s downgraded MSU one notch to Aa2, affecting approximately $975 million of rated debt. The outlook is negative.

In April, S&P Global Ratings lowered its outlook on MSU's AA-plus rating to negative from stable citing similar concerns. S&P did not provide a comment on the settlement agreement.

“There was talk of settlement amounts closer to $1 billion, so from a credit perspective, ‘only’ a $500 million payment is a positive development,” Fabian said. Still, Fabian said, there the risk of more lawsuits or liability remains on the horizon.

Vince Finaldi, a lawyer for the Nassar victims, said that the settlement requires that victims withdraw support for proposed legislation to extend the statute of limitations for filing lawsuits stemming from sex crimes and lifts governmental immunity protections for public institutions.

The package of bills aimed at preventing sexual assaults and approved by the Michigan Senate on March 14 would strip MSU's ability to defend itself.

Moody’s warned that the university will continue grappling with the fallout from recent sexual abuse cases. Michigan Attorney General Bill Schuette last month filed charges against William Strampel, who was dean of MSU's College of Osteopathic Medicine for 15 years. Strampel, who was Nassar's boss, is accused of sexual misconduct.

The university has approximately $1.2 billion in outstanding debt including $180 million of outstanding commercial paper. The bonds and CP are secured by general revenues, which include tuition, auxiliary system revenue, unrestricted gifts and unrestricted investment income but exclude state appropriations. At the end of fiscal 2017, the university reported nearly $3.5 billion in total cash and investments.

"We are truly sorry to all the survivors and their families for what they have been through, and we admire the courage it has taken to tell their stories," Brian Breslin, chair of MSU's Board of Trustees, said in a statement announcing the settlement. "A successful resolution to the litigation is a positive step in moving us all forward."

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