S&P Publishes Annual Assessment of YU Finances

On December 6, Standard and Poor’s published a comprehensive report of YU’s finances. The annual report, released to The Commentator by the credit agency, included a downgrade of YU’s long-term rating from an A+ to a stable A. The rating places YU in the middle of S&P’s investment grades, which range from AAA to BBB-. Despite the downgrade, YU remains far above so-called speculative grades, which range from BB+ to D, indicating default.

According to S&P, the rating is “intended to provide investors and market participants with information about the relative credit risk of issuers and individual debt issues that the agency rates.”

S&P previously downgraded YU from an AA to AA- in May 2011. In January 2012, the rating service downgraded 13 institutions of higher education, including Amherst College, Tulane University and YU. Combined, both Moody’s and S&P upgraded only eight colleges in 2012.

In an interview with the primary analyst of the report Carolyn McLean, The Commentator learned that while “after the recession, a lot of universities had budgetary and fundraising pressures, Yeshiva’s problems have been more acute.” McLean summarized the downgrade, “what makes Yeshiva stand out are its operating deficits—the revenues Yeshiva is bringing in are far lower than their total expenses. In short, they are spending more than they are bringing in.”

As of June 2012, the university reported $493 million in debt. S&P, like the Moody’s report on October 9, cited the “magnitude and duration” of heavy borrowing and negative cash flow as a reason for the downgrade. The report revealed a five-year weakening in financial performance and the absence of a plan to improve the school’s situation. “Management does not budget on a full accrual basis and has difficulty obtaining timely information from the university’s many business units,” the report noted.

In a December 10 letter to faculty members, President Joel promised a new strategic plan with the input of deans, faculty, administrators, and trustees. “Schools and departments are asked to identify areas for both immediate and long term budgeted expense reductions,” the President wrote, “All of this work is in support of a plan of action still being finalized, but built on a foundation of academic and operational synergy.” A “sound business plan,” no doubt shaped heavily by YU’s new CFO Toby Winer, may be unveiled as soon as February 2014. However, S&P raised doubts. “Sweeping change is unlikely to occur quickly at this large and complex institution,” the report stated.

The report discussed a number of financial challenges YU now faces.In the first few years after the Great Recession, YU siphoned “unsustainable” draws of approximately 8 percent from its endowment for budget relief. Since 2012, YU has returned to a 5.5 percent spending policy, which S&P viewed “positively.” Although the credit agency did not obtain the 2014 operating budget, it forecasted another year of significant deficit. “We expect cash deficits to persist in the next few years,” the report noted.

While S&P’s report did anticipate that the significant shortfalls would continue, the agency expected that the implementation of a YU’s Banner Accounting and Grade System would help stabilize finances. It did not project a significant deterioration of YU’s financial resources in 2013, did not project that YU would take on additional debt beyond current plans, and projected stable student enrollment.

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S&P mentioned that the university does not plan to settle the $380 million sexual abuse lawsuit and that the cost of the investigations into the abuse have “strained operating budget and cash positions.” They did not believe the cost of the investigations materially altered YU’s credit or YU’s enrollment.

The report cited a number of credit strengths including a stable, self-selective undergraduate population with a strong matriculation rate of 66 percent in Fall 2013, “good” student quality as measured by SAT scores, and “good” retention levels.  The report also recognized YU’s strong revenue diversity with 31 percent of revenues from tuition, 35 percent from grants and contracts, 7 percent from endowment, 4 percent from ancillary revenue, 8 percent from hospital operations, and 6 percent from fundraising in 2012. Similar trends are expected in 2013.

The report also cited other positive news, including the fact that YU’s $1.4 billion capital campaign that has raised approximately $924.4 million in cash and pledges, expects to exceed its goal. The campaign, started in 2006, focuses on raising funds to support scholarships, faculty, infrastructure and capital, and the annual fund. The campaign was recently extended to raise an additional $400 million to support undergraduate scholarships.

“In sum,” Mclean said, “Yeshiva is still a solid investment grade.”