University of Louisville, Foundation Credit Ratings Take A Big Hit
Financial woes and leadership uncertainty at the University of Louisville and its nonprofit foundation caused big hits to their credit ratings this week.
On Tuesday, Moody’s Investor Service downgraded the credit ratings for both the university and the University of Louisville Foundation, citing “ongoing legal challenges and leadership changes” that risk U of L’s reputation and distract from its mission. Investors and lenders use the ratings to determine U of L’s credit worthiness.
Moody’s reports portray a shaky financial landscape at U of L, with a weakening financial future amid a turbulent transition process. Former President James Ramsey’s July resignation, Gov. Matt Bevin’s attempted changes to the board of trustees and several still-unfilled seats on that board all factored into Moody’s crediting cuts.
“The change in the governance and management factors into the credit rating mostly because of the distraction that it creates,” said Edie Behr, vice president and senior credit officer at Moody’s. “Here we have both governance and management in transition, and so that is a lot of distraction.”
The university’s underlying credit rating dropped one notch to A1, with the outlook stable. In explaining the drop, Moody’s reported:
- An operating cash flow margin “well below” expectations. Universities similar to U of L have a median margin -- cash flow from operations that is available to cover debt payments -- of 11 percent. U of L’s is 6.4 percent.
- Low liquidity: the university could quickly liquidate $150 million, or the amount necessary to cover 62 days of expenses. That’s well below the median of 156 days at similar schools.
- A “rising reliance” on healthcare for 27 percent of U of L’s revenue. This exposes the public institution to regulatory and reimbursement changes in the industry.
Among U of L’s strengths are its brand recognition and lack of exposure to pensions, Moody's reported.
The U of L Foundation’s credit rating plummeted even further than the university’s rating, with a three-level drop to A3. Moody’s labeled its outlook negative for the foundation, meaning the rating could drop even further if the issues aren’t resolved.
The foundation is a nonprofit corporation that exists to support the university and manage its roughly $700 million endowment. Until September, Ramsey led the foundation as well as the university, a structure that will change when the foundation hires an executive director.
Among the foundation’s issues cited by Moody’s:
- It is set to undergo a forensic audit.
- The nonprofit relies heavily on gift revenue, which can be volatile, and it has been transferring real estate assets to related organizations.
- It reported a “significant” 20 percent drop in cash and investments this year.
- Its policy to spend 5.5 percent of its endowment is higher than the 5 percent industry standard, which could erode the endowment over time.
- The cash flow margin is a “modest” 8 percent, while the foundation’s coverage of its debt service is “narrowly sufficient.”
U of L’s lower rating puts it at the median of public universities, according to a Moody’s analyst, with a financial situation that’s weaker than schools of similar size.
( Read KyCIR's coverage of the University of Louisville)
In an emailed statement, Harlan Sands, U of L’s senior vice president for finance and administration, pointed out that Moody’s “recognized the university as an ‘important provider’ of academic programs, research and healthcare.”
“The challenges they noted -- declining state appropriation and changes in governance, for instance -- have been well documented,” Sands said. “We look forward to addressing their concerns and improving in our areas of strength as we emerge from this period of transition.”
Bevin's spokeswoman, Amanda Stamper, on Wednesday said the fault lies with Attorney General Andy Beshear.
"Beshear’s politically-motivated lawsuit is the root cause of all the uncertainty surrounding UofL and now this downgrade," Stamper said in an email.
Bevin reorganized the U of L board by executive order in June, replacing it with a new, smaller board. Beshear sued to block the move and the old board was reinstated. His version of the board could be put back into place in January after the legislature weighs in.
Brucie Moore, chairwoman of the U of L Foundation board, said she was disappointed with the downgrade, but believed the foundation would address Moody’s criticism.
“The report notes several key Foundation strengths, including sizable financial resources, good liquidity, and a strong base of philanthropic support,” Moore said in an emailed statement. “These are all things on which we can build, along with improved governance policies, to regain Moody’s confidence in the Foundation and an enhanced rating.”
Behr, of Moody’s, said a university foundation’s credit rating typically mirrors or closely trails the school’s rating.
“The foundation is interwoven with the university, so the downward pressure at the university will necessarily impact the foundation,” Behr said. “The foundation is also much smaller than the university, and it has its own transition issues and capital has been declining, although it’s still robust.”
This story has been updated.
Kate Howard can be reached at firstname.lastname@example.org and (502) 814.6546.
Disclosures: In 2015, the University of Louisville, which for years has donated to Louisville Public Media, earmarked $3,000 to KyCIR as part of a larger LPM donation. University board member Stephen Campbell and former member Sandra Frazier have donated.