WASHINGTON — Covenant violations on lines of credit and poor operations caused Howard University's bond rating to drop with the possibility of the rating falling more if the university cannot fix operations that have been running a deficit in recent years, an analyst said.
The downgrade came from Standard & Poor's, which lowered its long-term and underlying rating on the university's $290 million revenue bonds to BBB from BBB+ June 19.
S&P, which called the future rating's outlook "negative" in its report, cited concerns over the university's "eroded financial margins" and an expectation of an operating deficit in fiscal 2015 as primary reasons for the change. The negative outlook means the rating firm sees about a 33% chance the downward trend could continue. Howard University officials could not be reached for comment.
Laura Kuffler-Macdonald, S&P's primary credit analyst on the report, explained that the institution's financial situation has been deteriorating since 2012 and during the first nine months of this year, the school is running $13.5 million in the red. The rating could be further affected by a $95 million draw the university has to renegotiate with its banks.
The operating problems stem from staffing issues dating back to 2013 that have only recently been fixed, as well as poor university hospital operations. However, the hospital entered into a management agreement with Paladin Healthcare in October 2014 that has slowly yielded success, culminating with its first positive monthly operations this June.
The firm said the future of the university's bond rating depends primarily on how the institution can address the previously noted financial issues.
"There is a possibility that the rating could go down which is reflected in the negative outlook. We could downgrade Howard if they do not succeed in turning around hospital operations," Kuffler-Macdonald said. "But should they continue on the path that new management has started by enhancing revenues and cutting costs, so that they generate consistent operating surpluses, we could keep the rating where it is."
S&P will reevaluate the university's financial health over the firm's standard two-year outlook period, starting from the date of the rating downgrade.
