Brown University, RI Bond Rating Outlook Revised To Negative From Stable On Significant Increase In Debt
(Editor's Note: We are republishing this article, originally published Sept. 4, 2020, to correct an error regarding the series 2020A bonds. )
CHICAGO (S&P Global Ratings) Sept. 4, 2020—S&P Global Ratings revised its outlook to negative from stable and affirmed its 'AA+' rating on various series of debt outstanding issued by Brown University and by the Rhode Island Health and Educational Building Corp. for the university. This outlook revision is in tandem with the addition of approximately $371.5 million to the series 2020A taxable bonds, issued May 2020. With this "tap" issuance, the series 2020A taxable bonds total approximately $671.5 million. S&P Global Ratings also affirmed its 'A-1+' short-term rating on Brown's commercial paper (CP) program.
"The negative outlook reflects our view of the university's pressured financial resource ratios at its current rating, due to a significant increase in debt during the second half of fiscal 2020," said S&P Global Ratings credit analyst Jessica Wood.
Although the university is issuing these bonds as a defensive liquidity measure, management reports it could potentially use proceeds to repay debt outstanding. The uncertainty about the duration of COVID-19 will affect that decision, and ultimately, whether resources to debt will increase during the outlook period. A lower rating is currently precluded given the exceptional enterprise profile strength and our expectation that the balance sheet metrics will improve with some resource growth and likely repayment of debt. Our assessment included unaudited fiscal 2020 results that demonstrate asset growth compared with audited 2019 results. We would likely lower the rating if the resource ratios do not improve to levels that are more in line with the current rating.
The 'AA+' rating reflects our assessment of Brown's:
- Impressive student demand, as its highly selective admissions demonstrate;
- Solid level of financial resources to operating expenses for the rating category, supported by an endowment valued at over $3.9 billion at fiscal year-end 2019, and fiscal 2019 expendable resources of $2.9 billion, which equals 2.4x adjusted operating expenses;
- Historically balanced financial performance, with good revenue diversity and budgetary flexibility, albeit with weaker operating performance expected in the near term due to COVID-19; and
- Strong fundraising results.
The rating also reflects our assessment of Brown's:
- Ongoing capital needs;
- High pro forma maximum annual debt service burden of 5.7%; and
- Significant increase in debt over the past year such that available resources to debt are stressed.
In our view, higher education entities face elevated social risk due to the uncertainty about the duration of the COVID-19 pandemic and unknown impact on fall 2020 enrollment levels and mode of instruction. We view the risks posed by COVID-19 to public health and safety as a social risk under our environmental, social, and governance factors.
If available resources to debt do not improve materially during the outlook period and relative to our rating category medians, or if Brown has substantial consecutive full-accrual operating deficits, we could lower the rating.
If the university is able to maintain breakeven to positive operating margins and available resources to debt increase substantially during the outlook period, we could revise the outlook to stable.
RELATED RESEARCH
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| Primary Credit Analyst: | Jessica L Wood, Chicago + 1 (312) 233 7004; jessica.wood@spglobal.com |
| Secondary Contact: | Jessica H Goldman, New York (1) 212-438-6484; jessica.goldman@spglobal.com |
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