The University of Idaho's issuer and revenue bond ratings have been placed under review for downgrade by Moody's Investors Service as the university moves forward with plans to buy the University of Phoenix, an online university.
The action affects roughly $130 million in rated debt outstanding as of June 30, 2023, according to the report released Wednesday.
Moody's analysts said a multi-notch downgrade is possible, but they don't know how far the university's current A1 rating could drop. The outlook has also been changed to "rating under review" from stable.
"We don't have nearly enough detail to know where this could land," said Emily Raimes, a Moody's associate managing director. "We just wanted to signal that it could be more than one notch. We try to be transparent and if it's capped at one notch we would say that."
The university announced in May plans to purchase the for-profit online university in a $550 million deal, but that the institutions would continue to operate separately after the deal.
The reason the potential downgrade could be more than one notch "is it's a pretty substantial increase in debt," said Moody's analyst Patrick Ronk. "That is the biggest reason, it could be a multi-notch downgrade."
The Regents of the University of Idaho formed a non-profit, Four Three Education, Inc., to purchase the University of Phoenix and convert it to a non-profit.
Four Three Education expects to issue $685 million in bonds to finance the purchase through separately secured debt. But university officials still have not announced the timing of the bond sale or any details, including who might be on the financing team.
"The planned debt financing by the University of Idaho's closely affiliated non-profit of a for profit organization with various legal and regulatory liabilities demonstrates the university's shifting financial strategy and risk management tolerance, a key consideration under our ESG framework and a driver of this review," Ronk said.
"University of Idaho has been expecting a reevaluation of our rating based on our desire to affiliate with University of Phoenix," said Jodi Walker, the university's executive director of communications. "It is unfortunate that Moody's news release relies on false assumptions founded in uninformed public statements and incorrect media reports."
Walker added that the university will meet with Moody's as part of the ratings review process and remains confident "that accurate information about our acquisition will facilitate confidence" in our financial position.
"We will wait until the credit agency has a full understanding of this transaction before addressing any of its substantive analysis," she said.
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The bonds will be repaid by 43EI, not the University of Idaho, they say, adding that the University of Phoenix will operate completely separate from the land-grant university. The university has said it expects to realize $10 million in profit annually after it purchases the online university; and that it might guarantee up to $10 million of bond payments.
The "reported nature of the sale and planned governance structure under which the Regents of the University of Idaho will be the sole member of Four Three Education, Inc. means that should the transaction be completed as planned, Moody's will view it as a substantial increase of U of I's total debt and leverage profile," according to Moody's report. "Reports indicate that the bonds will be secured by the revenues of Four Three Education with the potential for additional security assurance from U of I."
During the review period, Moody's analysts will be looking to see how "tightly linked they are legally and structurally and governance-wise, the likelihood of support," Raimes said.
Analysts will also focus on the underlying credit quality of the University of Phoenix on a standalone basis to help gauge future operating performance and assess the extent to which 43EI's operations will support and diversify U of I's overall scope of operations, Ronk said.
