(THE PICKET) Shepherd University’s credit rating has been downgraded by Moody’s Investors Service from A3 from A2 status for its almost $42 million in revenue bonds.
Ratings issued by Moody’s and other financial companies such as Standard & Poor’s and Fitch Ratings are used by investors and banks to determine the relative risk associated with lending money to different companies and institutions.
According to a Wells Fargo financial adviser who declined to be identified, a bond downgrade would “make it more expensive [for the university] to borrow money. The further down the bond grade goes, the more risk is perceived in the bond, therefor it would need a higher interest rate to cover that perceived risk. That’s really it in a nutshell.”
According to Moody’s, the downgrade reflects a revenue environment that is “expected to contribute to materially weaker operations over the next several years.” Cuts to West Virginia’s state higher education budget and low enrollment are seen as primary contributing factors to the university’s financial woes, and the state is expected to cut higher education for the fifth year in a row this July, possibly by 10 percent.
“Minimal opportunity for near term improvement,” was a major concern voiced by Moody’s in its decision to downgrade Shepherd according to the report. With a $3 million deficit, cash flow for FY 2016 is expected to be down 14.4 percent from the previous year. Containing expenses without harming core programming is seen as a challenge by the company, but Moody’s notes that university management has a record of spending discipline, even though the magnitude of cost reductions for the last two years hasn’t been able to match revenue loss.
The 15 percent decline in enrollment over the last four years and increasing competition from other institutions were among the most major factors contributing to the bond downgrade. Shepherd enrollment is expected to stabilize but remain “sluggish” for the foreseeable future, the report states. Shepherd relies more heavily on student charges than other universities in West Virginia that receive more state funding.
Construction for a new residence hall to begin this summer is expected to cost $22.7 million and would represent a 36 percent material increase in the university’s debt burden. Any delays or disruptions in the project could decrease Moody’s confidence in Shepherd’s financial footing, and contribute to another downgrade.
Despite all of the previously mentioned obstacles, the outlook isn’t completely grim. A3 is still considered a stable, upper medium grade, low credit risk rating, and Moody’s report highlighted strengths the university could leverage to have its status upgraded.
Despite declining enrollment, Shepherd’s role as a reasonably priced regional university means that its market will not disappear, and its proximity to other states allow it to pull in students from Maryland, Virginia, and Pennsylvania, allowing for strong demographic diversity, a plus due to West Virginia’s relatively low proportion of college-bound high school students. The low cost of attendance also means that Shepherd has room to raise tuition to help offset low enrollment and state funding cuts while still remaining competitive.
With 126 days of liquid funds available, Shepherd also has a cushion in the event of unexpected expenses.
Despite these strengths, Shepherd University still faces an uphill battle. Shepherd receives the least amount of state funding relative to its size out of any university in West Virginia. Over three quarters of the university’s operating revenue comes from tuition and other student charges, and stagnant enrollment will limit cash flow and possibly weaken operational performance of university programs, which may further harm enrollment.
Projected cuts to state funding and low enrollment, coupled with Shepherd’s small size, limit revenue growth prospects near term.
“We remain optimistic about our ability to address the financial challenges that would ultimately result in an upgrade,” said Shepherd University President Hendrix in an email to faculty.
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