Detroit-based Wayne State University’s strides to improve enrollment and turn around its operating performance have earned it an improved credit outlook.
Moody’s Investors Service on Wednesday affirmed WSU’s Aa3 rating and changed its outlook to stable from negative. S&P Global ratings affirmed its A-plus rating on the bonds. The outlook is stable.
The a university plans to sell $120 million in general revenue bonds next week with Bank of America Merrill Lynch as senior underwriter.
Proceeds will be used to construct several buildings on campus, including the Mike Ilitch School of Business in District Detroit, a STEM innovation learning center, and new renovations to the Hillberry Theater.
Moody’s said the outlook change reflects the university’s increasing financial reserves, improving operating performance, and the recent restoration of full accreditation status to its medical school.
In spring 2015, the Liaison Committee on Medical Education put the School of Medicine's accreditation on warning status following a site visit. The School of Medicine and university leadership addressed many of the concerns identified by the LCME, and in early 2017, the LCME conducted a limited survey visit and in October 2017 granted the school full accreditation status through the 2022-2023 academic year.
The stable outlook also incorporates expectations of stable to improving enrollment and operating cash flow margins above 9%.
“The university's improved operating performance will continue, driven by careful expense budgeting and recent revenue growth,” Moody’s stated. “We expect the university to continue to generate operating cash flow margins above 10% in fiscal 2018 and 2019. “
The rating agency noted that despite the improvements, the university’s reliance on students from a demographically challenged region, a liquidity profile weaker than peers, and comparatively thin, albeit improving, operating performance remain credit challenges.
Moody’s had dropped the outlook to negative in August 2016. The actions were driven in part by pressures from steady enrollment declines.
“Enrollment now appears to be stabilizing,” Moody’s said.
Fall 2017 full-time equivalent enrollment was 20,221, improved from 20,063 in the previous fall. Wayne State has also undertaken targeted recruitment strategies aimed at stabilizing and eventually growing enrollment.
However Moody’s noted that increasing enrollment may be challenging to achieve since university has a very regional draw. Roughly 90% of its total students originate from the southern sections of Michigan, and most are from the city of Detroit, which has witnessed significant population loss.
The bonds are secured by a pledge of general revenues, which constitutes all student tuition and fees, net auxiliary revenues, indirect cost recoveries, and unrestricted investment income, but exclude state appropriations and gross revenue from the university's housing facilities that are controlled and operated by private developer, Corvias Campus Living.
WSU closed on a 40-year partnership with the developer last December. The deal, allows the school to finance its housing master plan and retire existing debt while also providing $800 million of reinvestment capital over the life of the partnership.
Post issuance, the university will have about $405 million of debt outstanding.