Following S&P rating downgrades, 5 Illinois universities now have junk bond status

Kevin HoffmanReboot Illinois

Apr 21, 2017

Just days after Moody’s Investors Service placed six of Illinois’ public universities under review for further credit rating downgrades, S&P Global Ratings announced Thursday it lowered its ratings of six state institutions as well as City Colleges of Chicago.

Among the schools slapped with rating downgrades was the University of Illinois, which largely has been able to weather the nearly two-year-long budget storm better than the smaller public colleges that are much more dependent on financial aid from the state.

S&P dropped the University of Illinois’ bond rating one notch from AA to A with a negative outlook, noting that under its rating criteria, higher education institutions with a “significant reliance” on state funding only can rate three notches higher than Illinois’ overall rating, which stands at BBB.

As for the other public universities S&P rates, five now have junk bond status.

Southern Illinois University dipped into junk bond territory as its credit rating fell from BBB to BB. Western Illinois University also saw its rating lowered to below investment grade, from BBB- to BB- rating. Illinois State University maintained its A rating.

With the latest round of downgrades, SIU and WIU now join Governors State University, Northeastern Illinois University and Eastern Illinois University in the junk bond group.

Both NEIU and EIU saw its junk-level bonds drop even deeper, to B from BB. And GSU had its credit rating cut slightly to BB, shedding its previous BB+ standing.

“The downgrades on these bonds reflect the effect of Illinois’ severe budgetary challenges–as demonstrated by its nearly two-year-long budget impasse–on the universities’ financial positions, specifically as it relates to unrestricted cash flows and liquidity,” S&P said in a news release. “Specifically, the downgrades reflect our view of the universities’ recent operating deficits, pressured balance sheet metrics and diminishing reserves, and continued dependence on state appropriations to support operations.”

In response to news of the downgrades, Illinois Secretary of Education Beth Purvis said in a statement that Gov. Bruce Rauner “understands and is gravely concerned about the severe financial challenges facing our students, colleges and universities due to the General Assembly’s failure to pass a balanced budget.”

“This crisis is why he is working every day to find consensus on a budget that is truly balanced, and ensure the state’s higher education system thrives in the long-term,” she added.

Democratic gubernatorial candidate and billionaire J.B. Pritzker said in a news release Rauner should be “ashamed” of the recent spate of downgrades.

“State universities are the backbone of our state and help us attract talent for the next generation,” Pritzker said. “It’s downright wrong that students are paying the price for a political fight and failed leadership. Bruce Rauner should be ashamed that his political agenda is preventing thousands of students from getting a world-class education right here in Illinois.”

Illinois’ higher education system, which hasn’t received any state funding since the stopgap measure expired at the end of last year, are at risk for more downgrades if a budget resolution is not reached soon, S&P warned.

From S&P:

While the delayed state appropriations and payments directly affect the financial profiles of these universities by stressing their liquidity, operating margins, and available resources over the long term, the prolonged budget impasse has also started and may continue to hurt the enterprise profiles of these institutions, though to varying degrees. Staff and class reductions and the general ambiguity surrounding state funding have, in our view, weakened many of these institutions’ competitive market position with regard to faculty, staff, and student recruitment. If these pressures continue, these universities will have minimal resources and limited flexibility to implement any significant strategic efforts to repair the damage done to their brand and general market position over the past few years.

S&P also knocked down bond ratings for City Colleges of Chicago, which operates seven community colleges, four notches to BBB from an A+.

On Monday, Moody’s downgraded NEIU two notches from Ba2 to B1 and said it is reviewing the ratings of six other schools, potentially affecting $2.2 billion in public university debt.

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