BRADENTON, Fla. – Kentucky’s University of Louisville saw its bond rating lowered amid weak operating performance and a federal investigation into basketball recruiting that could pose a risk to its reputation, said S&P Global Ratings.

S&P on Friday downgraded to A-plus from AA-minus the state-supported university’s general receipts bonds, affecting about $165 million of outstanding debt. The outlook is stable.

University of Louisville Grawemeyer administration hall
The University of Louisville’s Grawemeyer Hall, built in 1926, houses administrative offices. University of Louisville

The university had $205 million of total outstanding long-term bonds as of June 30, 2016, according to its most recent audit posted on the Municipal Securities Rulemaking Board’s EMMA filing system.

The university’s weak performance the past couple of years includes adjusted full-accrual basis deficits and significant depletion of available resources and liquidity, said S&P analyst Jessica L. Wood.

“This resulted in financial resource ratios compared to operating expenses and debt that are no longer consistent with our AA category medians, even when including the university's component units' available resources,” Wood said.

Over the past 18 months, there has been significant turnover in senior management, with a third president taking the position during this timeframe, and an entirely new board seated as of January 2017, she said.

In July, an academic affiliation agreement with University Medical Center was amended, which S&P said created potential integration and funds flow risk, although management reported that in the first five months there has been no funds flow disruption.

“Other recent events, including the appearance of former senior athletic staff in a recent FBI investigative report, could also create some long-term reputational risk, in our opinion, although management reports that fundraising is stable and applications for fall 2018 are significantly higher than those of a year earlier.”

The former member of the men's basketball coaching staff is the subject of a National Collegiate Athletic Association complaint that is being appealed, S&P said, adding that the FBI recently informed the university that other former basketball coaching staff members are part of a broader investigation into college basketball recruiting.

“Management reports that the university's athletic director, head coach, and assistant coach have been dismissed with cause and a second assistant coach is on administrative leave,” Wood said. “We will continue to monitor any further related actions.”

S&P said it assesses the university’s profile as very strong with historically stable enrollment, a good demand profile, and a solid research presence, although senior-level management turnover and pending legal matters offset those strengths.

Susan Howarth, the university’s interim chief financial officer, said it’s important to note that S&P’s action represents “a slight downgrade.”

“Our rating remains above the state’s bond rating and is a very good rating,” she said. “In addition, a stable outlook tells us S&P believes that our recent financial changes place us in a much stronger position going forward. Our enterprise profile remains extremely strong, which demonstrates confidence in the university’s future.”

S&P assigns Kentucky an A-plus issuer credit rating with a negative outlook.

In the wake of the federal recruiting investigation, the university in October fired head basketball coach Rick Pitino, who had said that he was “shocked by the allegations.” Pitino, who had a contract with the university until 2026, has filed a breach-of-contract lawsuit.

On Dec. 5, the Southern Association of Colleges and Schools Commission on Colleges voted to remove the university from probation, where it had been since 2016.

The SACSCOC had placed Louisville on probationary status after raising concerns about the governing board, selection of the chief executive officer, board conflict of interest, external influence over the board, and dismissal of the board, as well as the university’s financial stability and control of finances.

“Our faculty, staff and administration worked diligently to address the commission’s concerns, and we are on solid ground for the future,” interim president Greg Postel said when the Dec. 5 decision was announced. “Our academic programs continue to be strong, and the SACSCOC decision should assure our students and alumni that a University of Louisville degree will continue to be valued.”

The university is planning to issue $182 million of general receipts bonds and $54.3 million of taxable general receipts bonds in mid-January, according to the state office of financial management.

Moody's Investors Service downgraded the university’s underlying rating to A1 from Aa3 in November 2016 due to its weakening operating and liquidity position, as well as governance and management issues. In October, Moody’s put the university on review for downgrade – where it remains – due to new developing credit issues, including the federal criminal allegations involving basketball recruiting violations.

Moody’s said the allegations had the potential to increase the university’s financial burden and its weakened liquidity profile.

The University of Louisville was established by the state legislature in 1846. It has 13 academic schools and colleges, and a budget of $1.28 billion for the 2016-17 year.

Enrollment in the fall of 2016 was 22,640. Faculty and staff total 7,074.

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