A potential default and accreditation problems at Bethune-Cookman University, one of Florida’s four federally designated historically black colleges and universities, led Fitch Ratings to drop the university’s bond rating six notches to CCC-plus.
The downgrade from BB-plus is due to a disclosure by Bethune-Cookman's bond trustee about a potential payment default on bonds issued in 2010 and the possibility that bondholders could accelerate payment of the debt, said Fitch analyst Tipper Austin.
“BCU has long-term resources in excess of the approximately $17.5 million of outstanding series 2010 bonds, but likely does not have sufficient unrestricted and liquid funds to pay the bonds in the event of acceleration,” Austin said, adding that the university expects to request a forbearance agreement.
Fitch maintained its Rating Watch Negative status, and said no payment default has occurred on the bonds.
U.S. Bank NA, the trustee, notified bondholders in April and October about ongoing litigation and a potential violation of the bond indenture because the university entered into a capital lease in 2015 to build a dormitory. The indenture included restrictions on BCU’s ability to take on new debt.
According to documents filed with the disclosure, the complaint contends that BCU missed several payments and defaulted on the lease. The suit is seeking $85 million.
“BCU has made a step toward restructuring the dormitory lease in a way that is favorable to series 2010 bondholders,” Austin said.
In October, the court approved a joint stipulation between BCU and Wells Fargo, the trustee for the dormitory developer’s lender, in which BCU has agreed to make monthly lease payments directly to the lender.
Daytona Beach-based Bethune-Cookman has seen its ratings slide lower over the past several years because of financial difficulties. The university lost its investment-grade rating in June, when Fitch downgraded it to BB-plus from BBB-minus.
The school issues bonds through a Florida conduit, the Higher Educational Facilities Financing Authority.
Fitch said BCU's performance has improved from a low point in 2016, although the university continues to generate sizable losses. Although the 2018 audit hasn’t been released, Fitch said it expects the university to report a loss of approximately $8 million.
“The continued pace of losses and resulting deterioration of the university's unrestricted liquidity will likely result in a going concern note in the 2018 financials,” said Austin.
BCU’s board has approved a turnaround plan that includes $4 million to $5 million of recurring expenditure cuts through a workforce reduction plan, as well as tighter spending controls and budgeting processes.
Financial problems are among the reasons the Southern Association of Colleges and Schools Commission on Colleges placed BCU on probation in June.
SACSCOC said in a Nov. 15 status report that the university has been proactive identifying and addressing concerns “that demonstrates continuous improvement.” While progress is being made, BCU will remain on probation for a year.
Fitch said it views the probation as a “significant negative credit factor” because if accreditation was lost it would materially impair the university by effectively cutting off its ability to access federal student aid.
