Moody's Downgrades Northwestern University's Credit Rating

EVANSTON, IL — One of the "Big Three" rating agencies stripped Northwestern University of its top credit rating last week.

Moody's Investors Service Thursday cited "ongoing weak operating performance projected for the next several years" as it announced the university's downgrade from Aaa, its highest rating, to Aa1, which is still considered investment grade. According to Moody's, the rating affects $2.2 billion of the university's debt.

As of the end of its last fiscal year on Aug. 31, 2018, the university had $11.5 billion in total cash and investment reserves. It has generated an average of $379 million in gift revenue over the past three years and has $2.4 billion in operating revenue, according to Moody's, which noted its "very high" ratio of debt to cash flow — 18 times higher in the last fiscal year.

"Northwestern's leadership has implemented expense management efforts with indications of improvement in fiscal 2019 and beyond. However, operating performance will remain well below historic levels for the foreseeable future," Moody's announced, suggesting it would be challenging for the university to achieve its projected spending cuts amid pressure to invest to stay competitive with other elite universities.

Along with the ratings downgrade, the agency upgraded its outlook for future ratings from negative to stable. That reflects an expectation that Northwestern would slowly improve its cash flow, add revenue from net tuition revenue and add cash and investment income, according to a statement from Moody's.

The university risks a further downgrade if it fails to get a balanced budget in place and "maintain fiscally balanced operations," if it issues more debt without improving its operations, if it spends too much of its reserves or sees an extended period of declines in its investment, according to Moody's.

Fewer than 15 private universities had Moody's top credit rating as of the start of this year, according to the ratings agency, and Northwestern, which had held the Aaa rating since September 2006, still has the top credit rating among local universities.

In July 2014, Moody's downgraded the University of Chicago's credit rating from Aa1 to Aa2, and Loyola University of Chicago's rating is currently two levels lower than that after it was upgraded from A2 to A1 last year.

University administrators have been seeking to fill a budget hole of nearly $100 million since early 2017, according to the Daily Northwestern. Ahead of the end of its fiscal year last summer, the school implemented "stronger controls on spending" and suddenly laid off dozens of staffers and eliminated dozens more unfilled positions. Each of the university's departments were directed to cut 5 percent, leading to the elimination of some faculty positions at the law school.

"Governance and management practices, including a focus on restoring fiscal sustainability, are overall sound and supportive of continued credit strength," Moody's noted.

Craig Johnson, Northwestern’s senior vice president for business and finance, said in a statement the university would "continue to operate with discipline and prudence" as it aims to balance its budget by the end of the 2021 fiscal year.

Johnson said the revision would have "minimal impact" on the university's ability to borrow more money or its day-to-day operations. He noted that Northwestern still has AAA ratings from Fitch, which projects a stable outlook, and Standard & Poors, which has a negative outlook. He said the university has been in a "period of strategic investment" in recent years where it had success "growing our research enterprise, recruiting and retaining key faculty, and elevating our student body quality."

Northwestern is also seeking permission from the Evanston aldermen to modify the the city's zoning code to allow for-profit events at Ryan Field and other facilities on the north side of town, which it estimates will bring the city about $500,000 in additional annual revenue.

Currently, city code only allows nonprofit and amateur athletic events. The Evanston Plan Commission voted 4-2 at its Sept. 11 meeting to recommend allowing the new uses with some conditions. The full City Council has not taken up the request, which has been opposed by neighbors in the 7th Ward.

Related:

• Northwestern Law School Cuts Faculty, Staff Amid Budget Deficit
• Biggest Spender On Sports Aid In Nation Is Northwestern
• Northwestern University 'Suddenly' Lays Off Dozens Of Staffers