Moody’s downgrades DePauw credit rating

In a reflection of current financial climate for traditional higher education institutions, Moody’s Investor Services recently downgraded the credit rating for DePauw University.

As was first reported by Yahoo Finance on Monday, Feb. 8, DePauw’s rating was changed from A3 to Baa1.

According to Moody’s, which is considered one of the preeminent credit rating agencies in the world, “Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.”

Meanwhile, “Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.”

The numerical modifiers attached to each rating (which range from 1 to 3) indicate where an institution ranks within each of the nine generic ratings scales, which range from Aaa at the high end to C at the low end.

The Yahoo report noted that the action affects approximately $74 million of rated debt.

“The downgrade of DePauw University’s rating to Baa1 from A3 is based on fundamental market difficulties that have driven multiple years of declining revenue, with limited near term likelihood of reversal,” the report notes.

Speaking on behalf of the university, one DePauw official noted the news is reflective of state of higher education.

“The general landscape for higher education remains challenging and the pandemic has only compounded that,” DePauw Vice President for Administration and Finance Bob Leonard said. “DePauw is not alone in facing this challenge.”

However, officials remain positive.

“We are optimistic about Dr. (Lori) White’s recent appointment as DePauw’s 21st president and her leadership in engaging the entire community in a new strategic planning process,” Leonard said.

The report notes enrollment declines and tuition revenue covering less than 40 percent of educational expense in 2020 as “contributing to the university’s significant structural imbalance.”

“Governance has been slow to address these issues, leading to our view of poor financial strategy and risk management,” the report notes. “In most years, the university’s significant operating deficits for the last decade have led to an inability to cover debt service from operating cash flow, though debt service payments have been made with the help of the endowment.”

The report also notes, though, that a number of factors keep DePauw’s position strong.

“The Baa1 rating remains supported by still very strong wealth and liquidity, providing the university with notable runway to address the speculative elements of its market profile,” the report notes. “Cash and investments totaled nearly $650 million as of fiscal year end 2020, with spendable cash and investments covering close to three years of operating expenses.

“Other positive considerations include still strong gift revenue highlighting ongoing board and alumni support for the university’s mission, a historically good reputation as a selective liberal arts college providing some prospects to rebuild demand, and more recent efforts to align the university’s expense base.”

Moody’s also notes the change in president, as well as a focus on sustainability, which Leonard also noted.

“One of the pillars of that plan is long-term institutional and financial sustainability,” Leonard said. “That focus, combined with DePauw’s robust endowment and what Moody’s pointed out as strong wealth and liquidity, should stabilize DePauw for years to come.”

Long one of the most stable employers in the area, DePauw laid off 41 full-time and 15 part-time employees in February 2019, as well as offering a voluntary retirement incentive plan to faculty members. Three months later, it was announced that President Mark McCoy would step down at the end of the 2019-20 school year.

In the meantime, the university has hired White as its new president, as well as undertaking a multi-phase project to build new student housing as well as an overhaul of Roy O. West Library.