Mounting lawsuits, a weak financial outlook, and the recent probation of Bethune-Cookman University’s accreditation drove credit rating agency Fitch Ratings to downgrade B-CU’s bonds to junk status this week.
This is the third time Fitch has downgraded the university in less than two years. This downgrade is especially significant because it’s the first of the three that pushed B-CU’s credit rating over the line from investment grade to a junk status.
Fitch's primary concern was the possibility that B-CU could suffer lower enrollments, face fundraising challenges, or that it could reverse direction of its recent financial progress, Tipper Austin, a director in Fitch’s U.S. Public Finance group, said in an emailed statement.
B-CU did not return calls or emails.
The ratings change means B-CU now has a higher likelihood of defaulting on its $19.2 million higher educational facilities financing authority revenue bonds, which are debts that the university must pay back with interest.
“The one-notch downgrade to 'BB+' from 'BBB-' reflects the incremental increase in credit risk for bondholders,” Austin said, adding that, the "BB" category rating signals to investors a greater risk of default, especially in the event of adverse changes in conditions.
The lower rating doesn’t just repel potential investors, it also could make it more expensive for B-CU to borrow money.
“Looking forward, a below-investment grade debt rating might raise the cost of financing next time an institution needs to borrow," Austin said, because of less favorable terms from lenders B-CU might have to pay a higher interest rate.
Accreditation concerns
In the report released Wednesday, Fitch cited the Southern Association of Colleges and Schools Commission on Colleges’ (SACSCOC) June 14 placement of B-CU on probation, which is a more serious sanction than a warning, as a reason for the downgrade.
While B-CU’s interim President Hubert Grimes blamed both the media and ongoing lawsuits as reasons for the probation, the sanctioning commission cited issues with integrity, governing board characteristics, financial resources, financial responsibility and control of finances at the university.
According to the Fitch release, B-CU in its talks with the commission said the issues preceded the current administration and that it would work to resolve them.
A loss of accreditation would be serious because it could mean that B-CU students would have difficulty securing federal student loans. That would be especially devastating for a university such as B-CU, which depends heavily on student enrollment to fund operations. The potential for such a scenario was too great for Fitch to ignore.
“While loss of accreditation is unusual, Fitch views the probation as a negative credit development given that accreditation loss would materially impair the university,” the release says.
Other concerns
Fitch cited three lawsuits surrounding two B-CU student housing projects as additional reasons for the downgrade, including one filed by the school alleging its former president committed fraud surrounding the deal.
In all of the lawsuits, Fitch maintains that there have been “no material developments.” Because the outcomes remain unpredictable, the possibility of a negative ruling remains a concern for investors, Fitch says. And even if all the court rulings were favorable to B-CU, the high cost of legal fees could further negatively affect the school.
Besides lawsuits, Fitch also pointed to "management instability" as a contributing factor in the school's "financial deterioration."
“B-CU has appointed a new president and has had a largely new leadership team in place since 2017, but further leadership turnover or instability during the accreditation review would be a credit negative,” the report says.
Previously, Fitch had cited the high rate of turnover of B-CU’s chief financial officers, of which B-CU had three between 2015 and 2017, as a reason for concern. It's not clear if B-CU has made another change since then. The News-Journal was unable to leave messages with Angela Poole, the CFO listed on the school’s website.
In response to questions about Poole's role as CFO earlier this month, B-CU officials issued a statement that read in part, “The finance department remains fully operational but in a scaled-down capacity.”
The good news
Not all of the news was bad. Fitch acknowledged B-CU had improved in multiple areas.
“The rating is currently supported by underlying operational improvements including solid demand, growing enrollment and strengthening though still negative operating margins,” it says. “In addition, the university maintains adequate reserve levels for the rating level that provide financial cushion.”
Fitch also said that based on deposits for the fall 2018 semester, continued enrollment growth was likely.
While B-CU suffered operating losses of nearly $30 million between 2016 to 2017, Fitch noted that though B-CU didn’t have enough money to pay all of its debts, it did have enough to pay what it owed on the bonds.
B-CU’s credit rating still could spiral further downward if it’s not able to the right the ship, and the report cautioned that a reversal of its improvements could lead to a further downgrade. Though the university’s current rating is BB+, the Fitch rating scale goes down another nine tiers, to a D rating for entities that have defaulted.
Given B-CU’s situation, Fitch has maintained a negative ratings watch, which means investors should be wary of another potential credit rating downgrade. Fitch said it could remove the warning depending on how B-CU’s leadership addresses the issues.
For B-CU to improve its credit rating, Austin said it would have to resolve its accreditation issues; achieve a neutral or positive resolution of its lawsuits; and show continued progress in improving operating performance and enrollment trends.