DAYTONA BEACH — Uncertainty over the outcomes of costly legal battles surrounding two university housing projects drove credit rating agency Fitch Ratings this week to caution people about investing in Bethune-Cookman University.
This warning concerns $19.2 million of the university’s higher educational facilities financing authority revenue bonds, which are loans that B-CU must pay back with interest.
“The rating watch reflects Fitch's view that uncertainty around legal disputes involving B-CU heightens the risk of negative rating change,” a Fitch press release says. "The disputes involve a developer-led on-campus student housing project financed through a capital lease and a student housing project to be constructed off-campus by a separate developer, but terminated by B-CU before construction.”
A B-CU spokeswoman said the university was providing Fitch with updated information. B-CU will withhold commenting on the warning until after Fitch has reviewed the data, she said. Fitch did not respond to requests for comment.
Fitch’s decision marks the second time B-CU was hit with a negative rating watch in two years. The warning is not as severe as a credit rating downgrade. It means B-CU’s credit rating, which also has been lowered twice since December of 2016, could be lowered again.
A credit rating reflects an entity's ability to pay back its debt. Because lower credit ratings show an increased likelihood of default, they lead to higher interest rates and make it more difficult to borrow.
Fitch’s warning focused on the troubles surrounding B-CU’s 40-year lease of two 600-bed dorms, which are the subject of multiple court battles concerning defaulted rent payments and fraud surrounding the deal. The lease, which Fitch said was “aggressively structured and risk-additive,” calls for escalating rents that will break $10 million a year and will total more than $300 million when the lease expires.
While B-CU hasn’t paid on the lease since November, Fitch was told the university has been saving money so it can make back rent payments if ordered to, the release says.
If B-CU wins in court, Fitch wouldn’t necessarily upgrade the university’s credit rating. In fact, if legal costs prove excessive and strain the school's finances, the agency said it could further lower the rating.
Adjusting B-CU's lease to more favorable terms alone wouldn’t increase school’s credit rating. For an upgrade to occur, B-CU also would need to show “continued operating improvement over time,” Fitch says.
The second court case Fitch cited involves an agreement between B-CU and Heron Development Group to build a 290-bed, off-campus apartment building known as the MLK Lofts. Though Heron already had bought the land for the project, the deal soured after B-CU got cold feet.
B-CU contended its board of trustees never approved the project. Heron filed suit in January, arguing that B-CU officials presented the university as a fiscally sound partner that agreed on the project. That case is in mediation.
Besides land and court costs, Heron is seeking damages for tens in millions in lost future profits, “which could be substantial if awarded,” the Fitch warning says.
The last time Fitch issued B-CU a negative rating watch was in December 2016. The warning was issued along with a credit rating downgrade that slashed B-CU’s rating from A- to BBB. In June, the agency removed the watch but again downgraded B-CU’s credit rating to the current grade of BBB-, one tier above speculative grade investments or junk bonds.
The warning will remain in place until the lawsuits are resolved or their outcome can be reasonably predicted, Fitch says.