Standard & Poor's Ratings Services lowered its long-term rating to 'BBB-' from 'BBB' on bonds issued for Yeshiva University (YU), N.Y. by the New York State Dormitory Authority. The outlook is stable.
"The downgrade reflects our assessment of Yeshiva's continued significant operating deficits with the expectation that deficits will continue but narrow over time," said Standard & Poor's credit analyst Carolyn McLean. "Although we believe that management has made significant budget cuts to the Manhattan-based operations and sold its medical college over the last year, we expect deficits to continue for at least another two or three years and possibly beyond that." The persistent negative operating margins are indicative of a lower rating and have also weakened the balance sheet. Over the same time, Yeshiva's enrollment has held steady, student quality is good and the university maintains diverse program offerings, which provides the credit with some strength.
The rating reflects our assessment of the university's very strong enterprise profile, supported by stable enrollment, niche demand profile, and diverse program offerings combined with a vulnerable financial profile with significant operating deficits, modest financial resource ratios, and high debt service burden. Combined, these factors lead to an indicative stand-alone credit rating of 'bbb-' and a long-term rating of 'BBB-'. We based our analysis on the historical financial results for the Manhattan-based operations of Yeshiva, which excludes Albert Einstein given that Einstein is no longer an operating unit of the university. The numbers are an estimate of the new Yeshiva, but financial statements that reflect the new entity will not be available until after fiscal 2016 given that the university maintained ownership of Einstein for only the first two months of fiscal 2016.
The Albert Einstein School of Medicine (Einstein) is no longer an operating unit of Yeshiva University because it entered into a joint venture with Montefiore Medical Center (Montefiore) as of Sept. 9, 2015, with Montefiore having 51% membership interest and Yeshiva having 49%. This change materially changed how we view the university. We based our analysis of Yeshiva University as it exists currently. The Manhattan-based operations include the undergraduate campuses and nonmedical graduate components. As a result of the creation of the joint venture, about $180 million of debt was defeased or transferred to Einstein, as well as its associated assets, made up largely of its plant and endowment funds. Additionally, Einstein will make annual payments of $12.5 million to the university starting in September 2017, as well as payments of over $2.5 million for rent and services rendered. Einstein contributed significantly to the university's operating deficits but also provided it with revenue diversity in the form of clinical practice and research revenues. The financial resources ratios, when adjusted for the transaction are in line with that of the consolidated entity, although they will likely improve slightly in fiscal 2016 after payments and shifts in liabilities associated with the Einstein transaction are included in the audited financials. Operating margins remain very weak, although management notes it has made significant budgetary adjustments in fiscal 2016 to reduce the deficit and will continue to do so until it reaches break-even performance, which will take several years. The change of legal structure of the medical school is not expected to affect demand at either YU or Einstein.
