Moody's downgrades UT's bond rating in light of financial struggles

TOLEDO, Ohio (WTVG) - There are more financial issues for the University of Toledo as one of the nation's major bond agencies has downgraded the school and listed UT as having a negative financial outlook.

This is just the latest report of money problems the school is having.

The University of Toledo Medical Center is in the red with losses of nearly $15 million dollars through February. The school is also looking at layoffs and furloughs amid the COVID-19 pandemic, in part coming from major cuts in state aid to the tune of $4 million.

Right now, it's a difficult time for any college or university, not just UT. They're not sure what this upcoming school year will look like and what it could mean financially.

UT does plan to hold in person classes this fall.

As UT students, faculty and staff deal with a global pandemic, there are some enormous financial issues on the horizon. The school already projects a deficit for this fiscal year of $21 million and for fiscal year 2021 the deficit is projected at $36 million.

Tuesday, Moody's downgraded the university's rating to A2, which is the described as the middle of the scale. With the effects of COVID-19, Moody's also put the school's financial outlook at negative with the report saying that outlook reflects "very weak financial operation through at least fiscal 2021."

This rating affects the school's ability to bond out a project or borrow money. It judges the risk investors could incur and could affect an interest rate.

Moody's does say the outlook could improve. They include financial ways like sustained improvement in operating cash flow, enhancement of strategic positioning and then the major issue the school is dealing with UTMC.

Moody's says improvement in operations of execution of separation could help. The school is currently looking for proposals to either sell the hospital or find a partner.

Moody's says the rating could go down for a number of reasons. One included the inability to affect separation from UTMC while retaining associated research and academic programming.

Of the 10 Ohio public universities Moody's rates only 2 others have negative outlooks, Shawnee State and Wright State.

Bond Rating for all Ohio Pubic University’s that Moody’s rates:

• Kent State University Aa3/stable
• Northeast Ohio Medical University Baa2/stable
• Ohio State University Aa1/stable
• Ohio University Aa3/stable
• Shawnee State University Baa3/negative
• University of Akron A1/stable
• University of Cincinnati A1/stable
• University of Toledo A2/negative
• Wright State University Baa2/negative
• Youngstown State University A2/stable

The full statement from the University of Toledo is below:

The financial outlook for The University of Toledo is aligned with a negative forecast for both higher education and healthcare industries in this time of uncertainty. As a public institution, we are dependent on tuition revenue, state funding and hospital revenue, which continue to face competitive challenges exacerbated by the operational disruption as a result of the COVID-19 pandemic.

UToledo has been open and transparent about the financial challenges facing the institution. University leadership has taken preliminary, immediate cost saving measures to address a budget deficit of at least $20 million for this fiscal year. The University is planning multiple budget scenarios for the upcoming fiscal year with a projected $36 million deficit, maintaining our strategic focus on research, teaching and learning. As previously shared, given the fiscal realities UTMC is facing, the University has determined that it cannot continue to operate the hospital in its current state, depleting resources from the University and our primary academic mission. The public request for proposal (RFP) process is underway for a potential acquisition, lease, management agreement or other transaction of the community hospital with a deadline of June 10.

Full statement from Chancellor Randy Gardner, from the Ohio Department of Higher Education on this bond rating:

“Moody’s has identified the coronavirus crisis as a key factor in its financial rating of the university. Like most colleges, the University of Toledo faces significant challenges at this time, but we know that a strong Toledo is important to Ohio and especially to Northwest Ohio’s future. We'll continue to engage with the university to ensure that it remains a vital part of the region and the state.”

Moody's report:

New York, May 19, 2020 -- Moody's Investors Service has downgraded University of Toledo's (OH) ratings to A2 from A1. The rating action affects about $181 million of outstanding debt, with a final maturity in fiscal 2047. The outlook remains negative.
RATINGS RATIONALE
The downgrade of University of Toledo's (UT) rating to A2 from A1 is driven by heightened financial challenges that we expect to persist through at least fiscal 2021. Each of the university's three primary revenue sources - net student revenue, state funding, and health care - are under considerable stress that is exacerbated by the ongoing operational disruption tied to the coronavirus (COVID-19) outbreak. This pressured revenue environment will deepen operating deficits in fiscal 2020 and potentially fiscal 2021. Restoring balanced operations will prove challenging given ongoing market pressures confronting both the university and medical center.
We regard the coronavirus (COVID-19) outbreak as a social risk under our ESG framework given substantial implications for public health and safety. The coronavirus situation has created dislocation across industries and geographies and triggered urgent challenges for many businesses and organizations to address. Social distancing measures and other restrictions designed to curb the spread of the virus are exacting tremendous economic costs. The prospects and path of economic recovery for the second half of the year and beyond will depend on factors including when and at what pace lockdown measures will ease and to what extent fiscal and monetary policy measures are available to assist businesses and organizations. The combined credit effects of these developments are unprecedented.
Favorably, the university's A2 is supported by its regionally important role in northwestern Ohio as a key provider of public higher education and essential health care services. A diverse program mix and affordable pricing structure support continued student demand despite heightened market challenges. In addition, the university has substantial wealth providing for manageable financial leverage and a solid operating reserve. A sizeable $910 million expense base provides opportunities to adjust operations amid the business disruption tied to the coronavirus outbreak. Further, management's actions to pare spending along with the recently passed federal aid packages help mitigate the ongoing disruption in normal business operations.
RATING OUTLOOK
The negative outlook reflects our expectations of very weak financial operations through at least fiscal 2021 driven by heightened revenue challenges and business disruption tied to the coronavirus outbreak.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Sustained improvement in operating cash flow margins and debt affordability
- Material enhancement of strategic positioning, reflected in student demand, research growth, and fundraising
- Outsized growth in financial reserves and liquidity, strengthening coverage of debt and expenses
- Substantial improvement in UTMC operations or successful execution of UTMC separation leading to longer term enhancement in university financial performance
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Realization of more material downside risks associated with the coronavirus pandemic, driving both heightened revenue pressure and a weakened balance sheet position
- Inability to make progress towards improving operating performance over the next 12-18 months
- Deterioration in monthly days cash on hand
- Inability to affect separation from UTMC while retaining associated research and academic programming
LEGAL SECURITY
All bonds are on parity and secured by a broad pledge of General Receipts, including virtually all legally available revenues with the exception of state appropriations and restricted gifts. There is no debt service reserve fund.
PROFILE
University of Toledo is a large, comprehensive public university situated in Ohio's fourth most populous city. It offers diverse degree programs, including offerings in all seven professional fields of business, education, engineering, law, medicine, nursing and pharmacy. In fiscal 2019, the university generated $881 million of operating revenue and enrolled 16,970 full-time equivalent students in fall 2019.
The university operates the University of Toledo Medical Center (UTMC), a 249-bed medical center located on the Health Sciences campus. Formerly a level one trauma center, UTMC is now a level three trauma center and has shifted its focus to primary care and behavioral health. It also maintains specialty lines including kidney transplants, cardiology, orthopedic surgery, and cancer treatment.
METHODOLOGY
The principal methodology used in these ratings was Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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At least one ESG consideration was material to the credit rating action(s) announced and described above.
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