Credit rating agencies keep GW’s A-level ratings after $300 million debt increase

Construction for the Science and Engineering Hall will cost $275 million, which is “substantially in excess” of GW’s cash flow, according to S&P’s report. Zach Montellaro | Hatchet Staff Photographer

Analysts who grade universities’ financial health say GW is on stable ground after adding $300 million to its debt load because of plans to take advantage of lower interest rates.

After previously cautioning the University against adding more debt, two credit rating agencies gave GW the same A-level ratings it earned last year. Both agencies found GW’s financial resources could still support its debt amount, according to reports released last week.

GW will use $130 million of new debt to replace existing loans and lock in lower interest rates, cutting out about eight percent of its total debt load.

That will eventually bring its $1.7 billion debt down to $1.55 billion. GW will put the remaining $170 million toward construction projects, including moving Student Health Service to campus.

“We believe they’re at the debt capacity for the current rating,” Standard & Poor’s analyst Ken Rodgers said. “Because some debt ratios are a bit constrained, it’s not inconceivable if they were to issue any more debt of a reasonable magnitude, that could pressure the rating.”

S&P and Moody’s Investor Service kept their A+ and A1 ratings, respectively, for GW after weighing details like the University’s debt total, the amount it pulls in from tuition, the cost of ongoing construction projects and the strength of its financial foundation. They consider all schools in the A level – the top tier – to be in stable financial health.

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Ten of the 14 schools GW considers its peers have higher ratings in Moody’s A category, including New York, Boston, Northwestern and Tufts universities. American University is one of only a handful of schools to receive an upgrade from Moody’s over the last year and now shares GW’s A1 ranking.

GW had about $18.9 million in extra money for day-to-day expenses in fiscal year 2013, a 73 percent jump from the year before, according to the S&P report.

But the money GW has spent on projects like the $275 million Science and Engineering Hall and the $130 million residence hall District House is “substantially in excess of its cash flow,” the S&P report read. Though GW is stable now, it is also “unlikely” that it will increase resources enough for a better rating.

GW’s construction spending totaled about $275 million last fiscal year and will come to $175 million next year, according to the reports.

Treasurer and Executive Vice President Lou Katz declined to comment on whether the University plans to take out more debt in the future. He said in an email statement that borrowing at “key times” when interest rates are low will help GW save money in the long run.

Economics professor Donald Parsons, who wrote a report last winter that criticized the University’s long-term financial plan, said GW is taking a gamble by adding more debt.

“I think there’s no doubt this explosion of debt reveals the Board of Trustees’ thirst for spending exceeds substantially their ability to acquire the resources to do it,” said Parsons, who serves on the Faculty Senate’s fiscal planning and budget committee. “The obvious question is how excited will future students be about this spending now.”

District House will fit nearly 900 sophomores and juniors. Rendering courtesy of GW.

Jennifer Delaney, an assistant professor in education policy at the University of Illinois, said it is not uncommon for schools to take out debt to help pay for pricey construction projects.

“It makes GW more in debt right now, but it will likely pay off,” Delaney said. “They’re building things that (A) have value and (B) will last for a long time.”

Delaney said many schools like GW are investing in construction as an “arms race” in higher education puts pressure on schools to lure students away from competitors by offering top-notch buildings.

“Schools need nicer campuses and facilities to attract students and tuition dollars,” she said. “To attract students, they need to provide amenities students are coming to expect.”

The University’s relatively small $1.5 billion endowment keeps it reliant on tuition for 62 percent of revenue. Northwestern has a debt load of about $1.5 billion, but its endowment is more than five times larger than GW’s.

The Moody’s report noted that GW will likely not be able to continue increasing its tuition to grow revenue because of an already high sticker price of more than $60,000.

That pressure on the University’s bottom line could hurt it in the long term, said Noel Radomski, the director of the Wisconsin Center for the Advancement of Postsecondary Education. He said GW still faces “significant” challenges.

“I would not be taking out so many bonds at this moment and advancing capital projects at this time. It’s too risky at this point,” Radomski said. “Your endowment is too low in comparison with debt, but your tuition is too high because you can’t go too much higher given the market and public perception.”

The increased debt, which Moody’s said was about 1.41 times GW’s day-to-day revenue in fiscal year 2013, leaves administrators with little wiggle room, Radomski said.

“There’s a small margin for error,” he said. “You don’t just take out debt primarily because interest rates are low.”

Though S&P cited “uncertainty about future capital costs” for GW’s most recent financial undertaking – absorbing the Corcoran and committing millions of dollars to renovate its building – Moody’s said the merger would be manageable. The agency pointed out that Corcoran students can join GW’s existing programs and bring in revenue.

Both agencies also found that the public launch of GW’s fundraising campaign could help take some pressure off its high spending on capital projects if it reaches the $1 billion goal. The University has so far raised about $525 million with four years remaining of the campaign.

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