Debt limit violations on a Bethune-Cookman University bond drove credit rating agency Fitch Ratings to downgrade the school's credit rating to below junk status this week.
This is the fourth time Fitch has downgraded B-CU's bonds in roughly two years — and this change dropped the university's credit rating six tiers from what was junk status of BB+ to CCC+. The downgrade covers $17.5 million of higher educational facilities financing authority bonds issued to B-CU in 2010.
A rating in the CCC category means that a bond issuer poses a "substantial credit risk" where "default is a real possibility," a Fitch Ratings spokesperson said.
The downgrade is problematic for B-CU because lower credit ratings show an increased risk of default and make it more expensive for an entity to borrow money.
While B-CU is a private school that reveals little of its financial status, a Fitch press release about the downgrade reveals some of what B-CU officials have shared with the ratings agency.
The terms of B-CU's bond don't allow it to take on debts that are more than 50 percent of its revenues. It violated those terms in 2015 when the university entered into a lease agreement for new student housing, said Tipper Austin, a director at Fitch Ratings' higher education group.
"Specifically, B-CU agreed in the series 2010 bond documents to limits on how much additional debt it could borrow," Austin said. "It appears that the dormitory lease executed in 2015 counts as additional debt, and that it amounts to more debt than B-CU was actually allowed to take on."
The lease in question refers to a pair of 600-bed dorms, which when the 40-year lease ends will have cost B-CU more than $300 million. The terms of the dorm deal were so unfavorable to B-CU that the school filed a lawsuit against former President Edison O. Jackson and other key former officials alleging fraud for their role in the project.
Because B-CU broke the terms of the bond agreement, bond holders can demand what's known as bond "acceleration," giving them the right to demand the full repayment of the $17.5 million bond immediately, Austin said, adding that so far B-CU has made all of its bond payments on time.
While Austin said acceleration was "unusual" in the education sector, the new rating reflects B-CU's "heightened risk in the situation" and he noted that "B-CU may not have enough unrestricted and immediately available funds to pay that full amount."
A B-CU spokeswoman said the university was working to improve the situation.
In its report, Fitch noted that a June probation sanction by a regional accrediting body, ongoing lawsuits regarding the student housing project, continued operating losses, and lower enrollments all could further affect the university's ratings. It also maintained its outlook of "rating watch negative," which means further downgrades are likely in the near future.
The report noted that B-CU intends to pursue a forbearance agreement on the bonds. Austin said typically that in these agreements, bond holders agree not to demand payment in exchange for concessions like additional fees, monitoring or operating requirements.
While an agreement could improve B-CU's credit rating, Fitch expected the university's long-term outlook to remain "highly speculative," the release says.
The report noted that B-CU continues to suffer further operating losses. These follow the already nearly $30 million in operating losses shown on the university's last two tax returns.
While B-CU has not given Fitch drafts of its 2018 financial reports, the agency said B-CU expects a loss of about $8 million this year, the release says.
B-CU trustees have approved a turnaround plan that calls on reducing expenses by up to $5 million through increased spending controls and fewer employees. If their plan is successful, trustees expect the university to break even in the next two to three years, it says.
Not all of the news was bad.
B-CU now is required to make the payments it had been withholding on the dorm deal under a new agreement that calls for lower payments than the original lease agreement. Further, B-CU has paid what was owed on the dorms and Fitch viewed that as positive.
Correction: A Previous version of this story incorrectly stated B-CU's previous credit rating was BBB-. It was BB+. The new downgrade dropped the university's rating by six tiers.