Bonds

Chicago-based Illinois Institute of Technology lost its investment grade rating over rapidly escalating operating deficits that are expected to persist through at least 2024, governance practices, a risky debt structure and concerns over whether capital investments will pay off.

Moody’s Investors Service cut the private nonprofit university’s rating two notches to Ba2 from Baa3 Tuesday and warned of the potential for a further slide deeper into junk territory by assigning a negative outlook. The rating impacts $195 million of debt sold through the Illinois Finance Authority.

Moody’s had put the rating on review for a downgrade in January.

“The materiality of the deficits and speculative risk regarding return on spending for various strategic initiatives reflects a deterioration of the university’s financial strategy and risk management practices, as well as management credibility, key factors under Moody’s ESG framework and a driver of this rating action,” Moody’s said.

University officials didn’t respond to a request for comment.

A relatively high faculty tenure rate, elevated capital expenditures, and a science, technology, engineering and mathematics-oriented curriculum that demands ongoing investment to remain competitive limit expense flexibility, Moody’s said.

The university’s red ink and capital spending prompted the use of $62 million of reserves in fiscal 2022.

The university’s debt structure relies on working capital lines of credit and its various covenants add to credit risk and contributed to the downgrade.

A debt service coverage waiver from one of its lending banks and restructuring of the covenant moving forward would defray some of the immediate debt structure struggles, but acceleration risks remain if Illinois Tech is unable to stabilize operations, Moody’s warned.

Under covenants, the university must maintain unrestricted liquidity of at least $40 million and ongoing operating pains through fiscal 2023 and market volatility could trigger a violation.

“If the covenants are missed and waiver from the bank is not received, the outstanding principal and interest can be accelerated, which could also trigger acceleration of the outstanding Series 2019 bonds,” Moody’s said.

The school, often known as Illinois Tech, is located on Chicago’s near south side. The school generated operating revenue of $274 million, according to Moody’s adjusted total, and had an enrollment of 5,885 full-time equivalent students as of fall 2022.

Illinois Tech benefits from sound overall wealth and prospects for enrollment success given its established brand, STEM focus, and urban location, the rating agency said. Full time equivalent enrollment grew 7.8% in the fall 2022 and fiscal 2023 and net tuition revenue growth is projected to grow by 6.3%. A highly competitive student market and challenging demographic environment offset those strengths.

The delayed publication of the fiscal 2022 audited financials which is expected by the end of the month highlights “a rise in compliance and reporting risks as well, although management has favorably been proactive in providing investors with preliminary disclosures,” Moody’s said.

The negative outlook reflects prospects for further credit deterioration if the university is not able to make observable improvement in operating performance and stabilization of unrestricted liquidity beyond fiscal 2023. It also incorporates debt structures risks with relative short extension on working capital lines of credit.

Last year, Moody’s affirmed its rating as the balance sheet was bolstered by a healthy investment return in fiscal 2021 and donor support that contributed to a 30% increase in total wealth since 2017. Proceeds from the sale of a broadband channel and monetization of the university’s utility system in fiscal 2022 also provided a boost to liquidity in that fiscal year.

While some of Illinois Tech’s strains are unique to its own situation, smaller private universities across the country have faced a tougher road to recovery from COVID-19 pandemic than their larger counterparts.

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