S&P: Regent University, VA Bond Rating Lowered To 'BB+' On Liquidity Decline And Rising Deficits
"The lower rating reflects declines in liquidity and endowment coupled with increasing operating deficits, which management had hoped to control with enrollment and revenue growth," said S&P Global Ratings analyst Stephen Infranco. However, because of weaker-than-projected enrollment for fall 2015 (while strong enrollment gains were achieved, it was below the aggressive budgeted level needed to improve operations), increased spending on marketing initiatives ($6 million more in fiscal 2015 than 2014) and continued losses at The Founders Inn and Conference Center, the consolidated operating deficit continues to grow. In addition, Regent still maintains an aggressive endowment spending rate to balance operations and provide funding for strategic needs, which could put further stress on liquidity. Future rating actions will hinge on management's ability to sustain the recent enrollment growth trend and achieve projected levels to support the university's fixed cost structure or offset some of the revenue shortfall with expense savings and limit the need for extraordinary endowment spending over the longer term.
"The negative outlook reflects Regent's continued and growing operating losses and uncertainty regarding management's ability to reduce the endowment draws to more normalized levels within the 5% policy," added Mr. Infranco. Furthermore, operating performance needs to improve, as projected, or Regent's financial resources could decrease further due to continued extraordinary endowment spending.
S&P Global Ratings could lower the rating further if one or more of the following occur, including operating deficits that are sustained at or increase beyond current levels, unexpected declines in enrollment or if there are further decreases in available resources. In addition, if liquidity becomes constrained due in part to the collateral pledge on the line of credit, we could lower the rating.
We do not expect to raise the rating over the outlook period due to the continued weak operating trend and overall vulnerable financial profile. While management is projecting favorable revenue growth for fiscal 2016 and 2017, coupled with ongoing cost containment measures that will likely result in improved operating performance, the budget is built on headcount levels that may be difficult to achieve, although positive gains will likely be made. We would consider an outlook revision to stable if Regent can limit operating losses to a manageable level for consecutive years, while maintaining financial resources at or above existing levels.