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Moody’s Downgrades YU, Again: Baa2 Rating May Force Continued Austerity Measures

In July, Moody’s Investors Service, a major credit rating agency, downgraded Yeshiva’s credit rating from A2 to Baa1, citing “uncertain outcome and impact on student demand and philanthropy of recently announced litigation against the University.” On October 9, Moody’s downgraded YU’s rating again, this time to Baa2, the investment service’s second lowest grade.

The report cited “deep operating deficits driving negative cash flow and uncertainty regarding the outcome of litigation” as some of several reasons for the new demotion. The report also cited the university’s weak liquidity and a “full draw” on its operating lines of credit, including an expected breach to a $75 million line of credit from JP Morgan. The Moody’s report noted that the downgrade reflected YU’s inadequate cash reserves. The university reported only $123 million on hand, which translates to just over two months of operating costs.

The new downgrade could severely impede the university’s ability to fund programs and pay salaries, which the university promised to finally unfreeze this year. This downgrade also affects Yeshiva’s $323 million line of debt through the Dormitory Authority of the State of New York and will curtail the university’s ability to borrow more money.

The A2 rating is considered upper-medium grade and reflects a low credit risk; Baa2 is considered a medium grade and reflects a medium to high credit risk. Banks and other lenders use credit ratings to assess the risk of lending money. Moody’s noted that a downgrade to its lowest rating, Baa3, is still possible, pending review of YU’s operating deficits and finances.

The report estimates that given YU’s financial and public relations troubles, an upgrade to a higher credit score is not likely in the medium term, or five to ten years.

Matt Yaniv, director of media relations at YU, released a statement to The Commentator, insisting, “a strong rating for the University is of paramount importance and we take this opinion by Moody’s very seriously.” The statement notes that higher undergraduate enrollment numbers, improved fundraising efforts, and changes within the financial management of the University are all reasons to be optimistic.

The statement also noted that “near term budget tightening” was a priority for President Joel, perhaps implying that austerity measures put in place during the recession may continue.

As more information comes to light about the ongoing sexual abuse lawsuit, YU will likely continue to face negative media exposure that will further reduce the confidence financial institutions place on the university’s credit and debt. However, the Moody’s report also noted other unexpected challenges, including the changing market position of YU’s Bronx Hospital after Mount Sinai Hospital’s merger with Continuum hospitals, YU’s ability to obtain a waiver for its breach of credit, and changes in financial management given the arrival of new interim Chief Financial Officer Toby Winer.

On a positive note, the Moody’s report does highlight YU’s strong fundraising “niche” given its status as a Jewish university in New York City. It expects YU to sustain its access to philanthropic markets in 2014.