The University of Tulsa’s bond rating lowered two tiers in two years, risking accreditation.
On Dec. 19, Moody’s Investor Service, a major credit rating company, updated the status of the University of Tulsa’s revenue and student housing bonds. The downgrade — which shifted TU from its previously held Baa1 designation to Baa3 — involved a demotion of two ranks. With this new report, TU’s financial credit is precariously perched just one rating above what Moody’s labels “junk” bonds; these lower tier ratings indicate low investability and poor financial health. This most recent drop follows the previous downgrade to Baa1 in December of 2017.
In their public report, Moody’s described the outlook as negative, and wrote that both a “very weak operating performance resulting in further erosion of liquidity and an increasingly heavy reliance on a line of credit” are reasons for such an unfavorable forecast.
Among their reasoning for the loss in status, Moody’s cited a 24 percent drop in net tuition revenue between 2015 and 2019 and a rise in expenditures per student as reasons for TU’s recent financial difficulties. However, perhaps more importantly, the investor service went on to note that through the years 2015-2019, the university’s cash flow was often unable to cover the debts it had acquired.
Though the words True Commitment do not appear in the report, the report references TU’s plan “for optimizing enrollment, realigning academic programs and reducing the university’s currently unsustainable cost structure,” and acknowledges its potential to gradually improve operations. But that is qualified later in the report as it notes that even then “management will likely continue to confront headwinds during implementation.”
Along with their assessment of TU’s ability to pay back its debts, Moody’s listed multiple ways that TU’s rating could change again in the near future.
An increase in debt, increased or continued spending and a loss of credit could each cause TU’s bonds to drop further, earning ratings below investment grade. Though that would only require dropping one more level, from Baa3 to Ba1, the transition from investment grade bonds to high-yield or junk bonds would greatly affect TU’s ability to attract investors and could cause further accreditation issues with the Higher Learning Commision, TU’s regional accrediting body.
Conversely, if the university finds a way to increase its yearly cash flow, increases the amount of tuition revenue or achieves a growth in unrestricted funds without relying on the previously mentioned line of credit could all cause Moody’s to rate TU’s bonds at a higher and less precarious level.
TU’s Board of Trustees has yet to publish any official statements regarding the implications of this credit downgrade and they declined to comment on the matter The suggestion that the university is about to enter into a new period of austerity has been a prominent topic in a number of meetings, however this topic remains murky in the absence of official word from the Board.
As for TU’s administration, President Clancy stated that the downgrade “will have minimal impact on our ability to borrow and should not be felt in our day-to-day operations.”
However, TU Vice President of Finance Kevan Buck did not share the same optimism. On Jan. 16, Buck spoke to the Faculty Senate, communicating the potential for cuts that spanned far beyond those of True Commitment. Buck indicated that potentially, “everything is on the table; athletics, administration and faculty included.”
When asked whether this statement contradicted President Clancy’s earlier in the week, Buck could not be reached for clarification.
When asked this week about cuts, Clancy and Provost Levit asserted that the university is “reviewing all areas for increased revenue and reduced expenses.” However, both Clancy and Levit remained certain that the change of TU’s bond rating “does not have an immediate impact on our current cash flow.”
The Board of Trustees is set to meet in late January, and intends to announce a plan for the future in early March; it seems that a discussion over how the university can avoid falling upon a worse fiscal situation will dominate conversation.