CHICAGO – Hamline University in Minnesota is at risk of losing of its investment grade rating due to balance sheet strains.
Moody's Investors Service lowered its rating this week on $36 million of Hamline debt issued through the Minnesota Higher Education Facilities Authority to Baa3 from Baa2 and assigned a negative outlook.
"The downgrade is based on a substantial decline in unrestricted liquidity in fiscal year 2016 from the prior year," Moody's wrote. "Combined with moderate cash flow, the university has limited headroom under several debt covenants."
The negative outlook reflects the potential for further credit deterioration should Hamline trip those covenant requirements and is unable to cure them in a timely manner.
The downgrade further reflects the highly competitive environment Hamline operates in, with recent enrollment declines concentrated at the graduate level. Operating revenues are expected to remain relatively stagnant over the near term, providing only modest cash flow available for programmatic or capital reinvestment.
The current rating level is supported by the school's established brand in the Saint Paul/Minneapolis Twin Cities region which provides it with prospects for enrollment stabilization, "albeit at lower levels than in the recent past," the rating agency said.
Management has taken what Moody's called "material action" to contain costs and other initiatives, including the combination of its law school with William Mitchell College of Law to form Mitchell Hamline School of Law. "We expect cash flow to continue to provide adequate, albeit thin, coverage of the university's comparatively high debt service requirements," Moody's said.
The structure of Hamline's various debt covenants adds significant credit risk to its credit profile, particularly as the university now has very thin headroom under multiple covenants. For its directly placed $9.4 million of debt, Hamline has covenanted to maintain a minimum rating of Baa3 and a 1.15 times fixed charge coverage ratio. For FY 2016, the university reported only 1.2 times coverage of fixed charges. The school is also close to violating other covenants related to ratios to unrestricted liquid funds ratios.
