Moody's downgrades Valpo's bond rating

[vu72]

Rating Action: Moody's downgrades Valparaiso University's (IN) to Baa2; outlook revised to stable
27 Feb 2023
New York, February 27, 2023 -- Moody's Investors Service has downgraded Valparaiso University, IN's issuer and revenue bond ratings to Baa2 from Baa1. As of June 30, 2022, Valparaiso had $96.2 million of outstanding revenue bond debt. The outlook has been revised to stable from negative.

RATINGS RATIONALE

The downgrade to Baa2 reflects a large structural budget imbalance, with weak operating performance and debt service coverage likely over the next several years. Liquidity is already very thin, inclusive of draws under a working capital line, and will erode further, with the pace of decline dependent on the ability to successfully implement in a timely way initiatives to realign its program and expense structure with enrollment amid a difficult regional student market. The university generated a nearly 8% operating deficit in fiscal 2022 and the deficit for fiscal 2023 is forecast to be substantially worse, with below 1.0x debt service coverage from regular operations. 

Despite these challenges, Valparaiso University's Baa2 remains supported by its very good total wealth, good levels of spendable cash and investments, and a recognized regional brand bolstering a still good strategic position. Philanthropic support is relatively good with three-year gift revenue averaging over $15 million. Despite a use of some liquid reserves, spendable cash and investments continues to provide solid debt coverage at nearly 1.4x. An operating base of over $112 million provides some expense flexibility and potential for operating performance improvement through expense reductions. Additionally, the university has gained some traction in graduate programs, including nursing and information technology. 

RATING OUTLOOK

The outlook is currently stable incorporating the university's identified budget initiatives, which have some prospects for success on both the revenue and expense side.  The stable outlook also incorporates broader wealth levels that provide some financial flexibility to implement plans. The university's management team is relatively new without a yet established track record of reversing the university's multi-year enrollment and financial challenges. Inability to make clear progress in fiscal 2024, including meeting enrollment targets in Fall 2023 would have either rating or outlook implications.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Notable strengthening of brand and strategic position, reflected in growing enrollment and net tuition revenue and further growth in philanthropy

- Significant improvement in annual operating performance driven by net tuition revenue growth and expense reductions
- Material growth in total wealth and financial reserves with significantly stronger liquidity
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Failure to make progress towards stabilizing enrollment in fall 2023 with growth in net student revenue

- Inability to make substantial progress towards narrowing operating imbalances in fiscal 2024 and beyond, with consistent debt service coverage above 1.2x.
- Further reduction in unrestricted liquidity or broader wealth levels
LEGAL SECURITY

Outstanding debt is all unsecured general obligations of the university.  The J.P. Morgan Chase line of credit includes a financial covenant that unrestricted cash and investments to debt be at least 1.0x. The covenanted ratio stood at 1.5x in fiscal 2022. There are no debt reserve fund requirements.

[DuneHwx]

If only the university had some kind of crazy valuable asset that they could sell and shore up the financial stability and, by extenstion, future of the institution?

[NotBryceDrew]

If only, if we did though people rather hold on to it then provide the university with the working capital needed

[wh]

Valpo's "Forbes Financial Grades"

2019 C
2020 B-
2021 C
2022 C-

• Approximately 900 private universities graded
• D is the lowest possible grade
• Grade range: A, A-, B+, B, B-, C+, C, C-, D
• Valpo has plenty of company. At a glance, it appears that 30-40% of the 900 schools are at C- or D.

[crusader05]

All evidence points to tough times ahead. I think Valpo has the ability to weather it but it may require some slimming down or prioritizing investments aimed to slow the bleed.

There are a lot of schools out there in way worse positions that survive on 1,000 students or less that most likely won't be able to make it
https://julieroys.com/trinity-international-university-announces-closure-residential-program-camp/

Stories like this are going to keep coming and while most of the "bigger" fish will survive or seem to thrive a lot will have less to do with something they're doing and more with options seeming to decrease across the board.

[crusadermoe]

In calmer moments I think we all know that Valpo is not on the brink yet.  Even though they gave us a downgrade, they cite a high reserve of campus property value and a good regional reputation. 

The race is on to improve enrollment in fall 2023, 2024 and 2025 before the demographic cliff hits. How fast can you build a dorm?  That's why they need cash quick and the art sale can drive that cash injection.

Hiring Roger Powell might put us on the map more in Chicago.  How fast can he go into the admissions material with his pro and Illini credentials?

[wh]

A public financial report from 2020 shows that the university experienced a 6.5%/$12M loss. This marked the beginning of consecutive annual losses Moody projects will continue through 2023, and possibly beyond. From the Moody report, "...the university generated a nearly 8% operating deficit in fiscal 2022 and the deficit for fiscal 2023 is forecast to be substantially worse." Interpolating this limited data, it appears that the university will have lost roughly $54M for the 4-year period 2020-23.

I was involved in a somewhat similar situation in the past. It seemed that no matter what we did internally, nothing would stop the bleeding. Market rates bottomed out and reserves depleted over time. Ultimately, the business was sold to a venture capitalist, who reshaped it to complement their other business interests, including gutting the workforce, among other painful measures.

Unquestionably, the university is in serious financial distress, as defined by its inability to generate sufficient revenues or income, making it unable to meet or pay its financial obligations. Financial distress is generally due to high fixed costs, a large degree of illiquid assets, or revenues sensitive to economic downturns. Auctioning off millions of dollars in treasured paintings (illiquid assets) is testimony to it. The very idea that a group of educators thinks that the current situation appropriately calls for this-for-that bargaining with the administration demonstrates that they fail to comprehend the severity of the situation. If they honestly have ideas for reducing expenses, they, along with everyone else, should be offering them up freely and unconditionally.

[vu84v2]

Very clear story articulated by wh with financial data to back it up. I would add, however, that shoring up the cost side is only part of the necessary revitalization for Valpo. Investing in key infrastructure (dorms, key academic buildings) is only part of fixing the revenue side - there also needs to be an "all-in" effort to attract students via personal meetings with prospective students and their families. The macro-oriented approach from the university (i.e. selling the university) is only a part of this, as they need faculty in each college to be meeting with prospective students and their families that are interested in their programs - selling them on how the personal touch from individual faculty will increase their likelihood of succeeding and will provide them with a rich experience in their chosen field.

[vu72]

The very idea that a group of educators thinks that the current situation appropriately calls for this-for-that bargaining with the administration demonstrates that they fail to comprehend the severity of the situation. If they honestly have ideas for reducing expenses, they, along with everyone else, should be offering them up freely and unconditionally.

I've raised this point before. Crickets...

[David81]

The very idea that a group of educators thinks that the current situation appropriately calls for this-for-that bargaining with the administration demonstrates that they fail to comprehend the severity of the situation. If they honestly have ideas for reducing expenses, they, along with everyone else, should be offering them up freely and unconditionally.

I've raised this point before. Crickets...

This assumes that faculty are provided with sufficient access to budget and financial figures, which, in turn, enables informed participation in a genuine shared governance spirit and practice. Private universities are not obliged to disclose $$$ data beyond the meta-level stuff in their non-profit 990 tax filings, and many do not.

The annual losses accrued by VU are troubling but not unique among peer schools during these past few years. That absence of uniqueness does not counsel in favor of assuming the University will simply muddle through, but rather points to the fact that many, if not most, regional, private universities are struggling right now. It's not altogether clear how many of them will survive the coming demographic downturn in 18-year-olds ready for college and the ongoing trends of folks in that age bracket (especially young men) opting to pass on college, at least for now.

[crusadermoe]

In addition to the recent Bradley news of a $12M, add the large deficit of $56M faced by DePaul, a very large urban university. 

CoVID was a black swan event. But the whole country overreacted to the risks. Data was exaggerated and dissenters shamed.  Higher education (largely an esoteric idealistic and fearful group) reacted just as badly as the teachers' unions.  CoVID led to the discovery that remote learning was viable even if less desirable and it led to government coddling of universities financially at a point in 2020-2021 in a way that masked their business model flaws.

You could not pay me 20% more than I earn to move to the financial hell hole that is Illinois.   

[vu72]

In addition to the recent Bradley news of a $12M, add the large deficit of $56M faced by DePaul, a very large urban university. 

CoVID was a black swan event. But the whole country overreacted to the risks. Data was exaggerated and dissenters shamed.  Higher education (largely an esoteric idealistic and fearful group) reacted just as badly as the teachers' unions.  CoVID led to the discovery that remote learning was viable even if less desirable and it led to government coddling of universities financially at a point in 2020-2021 in a way that masked their business model flaws.

You could not pay me 20% more than I earn to move to the financial hell hole that is Illinois.   

And now, back to basketball! 

[crusadermoe]

(from Moody's last bond rating)

"The university's management team is relatively new without a yet established track record of reversing the university's multi-year enrollment and financial challenges. Inability to make clear progress in fiscal 2024, including meeting enrollment targets in Fall 2023 would have either rating or outlook implications."

Net tuition income is the critical number, not enrollment.

[crusadermoe]

The enrollment question now shifts to aggregate income from students. The campus might have a feel for that after the board meets again.  Income for Moody's purpose is driven by not just tuition, but also by room and board. 

[crusadermoe]

Well let's enjoy the holiday season and the start of basketball!  I will see everybody in January.

Hopefully the New Year will ring in (or have rung in) good news on two topics:

1)  Tuition income (rather than just the  of students) came in better than hoped in fall 2023.  The # of students only half the story.

2)  Paintings get sold for a high price, and that the dorm can be built to get on-line by July 2025.  But with some detective work, smart buyer agents will have the leverage because the school needs to sell on that timeline.   

[valpopal]

Well let's enjoy the holiday season and the start of basketball!
Hopefully the New Year will ring in (or have rung in) good news:
Tuition income (rather than just the  of students) came in better than hoped in fall 2023.  The # of students only half the story.

I can verify this. Merry Christmas!

[wh]

Well let's enjoy the holiday season and the start of basketball!  I will see everybody in January.

Hopefully the New Year will ring in (or have rung in) good news on two topics:

1)  Tuition income (rather than just the  of students) came in better than hoped in fall 2023.  The # of students only half the story.

2)  Paintings get sold for a high price, and that the dorm can be built to get on-line by July 2025.  But with some detective work, smart buyer agents will have the leverage because the school needs to sell on that timeline.   

Lawyer in VU artwork lawsuit now looking to pressure AG's office to block sale

VU declined to comment, but a spokesperson for the university said no final decision has been made on the sale of the artwork.

https://www.nwitimes.com/news/local/education/lawyer-in-vu-artwork-lawsuit-pressuring-ag-to-block-sale/article_b09bb098-8978-11ee-b00c-8b274114822b.html

Are you kidding here? To President Padilla. In all due respect, stop dragging your feet. Let's get those paintings sold and get on with construction.

[KreitzerSTL]

In all due respect, stop dragging your feet. Let's get those paintings sold

I believe the Indiana AG still needs to weigh in, if he's not too busy facing professional misconduct charges in his own state.

[crusadermoe]

I thought the ruling said that the Brauer and the law prof had no standing to sue.  In that case they strategic planning rationale had nothing to do with it.

[crusader05]

Selling immediately would not be a great move just because 1. people will assume they can low ball us out of desperation and 2. You've probably already missed your deadline to get it done when you wanted so you should take your time and both try to sell it for the most and to the most ethical seller. I'd imagine a lot of museum are wary to be the one to immediately buy it and will want a deal if they anticipate a black mark for doing it. Leaves you with private collectors who will definitely want to low ball you.  Odds are we will not get what they were valued at prior to the debacle until some time passes.

[valpopal]

Selling immediately would not be a great move just because 1. people will assume they can low ball us out of desperation and 2. You've probably already missed your deadline to get it done when you wanted so you should take your time and both try to sell it for the most and to the most ethical seller. I'd imagine a lot of museum are wary to be the one to immediately buy it and will want a deal if they anticipate a black mark for doing it. Leaves you with private collectors who will definitely want to low ball you.  Odds are we will not get what they were valued at prior to the debacle until some time passes.

I have shared details of my compromise proposal, briefly and generally outlined here a while ago, with various principal participants on all sides of this controversy, including President Padilla and the Attorney General, for consideration. I have no idea what will happen, but I still believe a compromise avoids further divisiveness among VU constituents and maintains respect from the outside art world with its innovative solution.

[vu84v2]

valpopal - With all due respect, your compromise plan would reduce revenues from the art by millions - which is not acceptable for the university. In some cases, a compromise makes no sense and this is one of them.

crusader05 - While I agree with your points about waiting for the right time to get the right price for the art, I do not believe that Valpo should be evaluating buyers by who is the most ethical. If someone offers a million dollars more than other prospective buyers or the estimated market price and they want to hang it in their house where almost no one can see it, that is not Valpo's problem. Valpo's mission does not include preserving or maintaining societal value for art.

[valpopal]

I do not believe that Valpo should be evaluating buyers by who is the most ethical. If someone offers a million dollars more than other prospective buyers or the estimated market price and they want to hang it in their house where almost no one can see it, that is not Valpo's problem. Valpo's mission does not include preserving or maintaining societal value for art.

From the Valparaiso University "Commitment to Ethical Behavior": "Valparaiso University believes fair and ethical practices are fundamental to a sound academic environment and appropriate business practices. In order to be successful, the University must achieve and maintain a high level of public trust and respect. This trust can be sustained only if the University's directors and employees model the highest standard of ethical behavior."

[VULB#62]

Ethical or "most" ethical?  Shouldn't this be a simple pass/fail?

Is it unethical for a respected private collector to purchase a work of art for their personal enjoyment or to display it  only to a limited audience?

Or is it unethical if a potential buyer uses ill-gotten gains (say, real estate fraud or drug dealing) to make the purchase?

[valpopal]

Ethical or "most" ethical?  Shouldn't this be a simple pass/fail?
Is it unethical for a respected private collector to purchase a work of art for their personal enjoyment or to display it  only to a limited audience?

This would not be unethical for the buyer, who establishes a personal set of standards. However, Valparaiso University in its mission is publicly committed to "the highest standard of ethical behavior." As well, "the University must achieve and maintain a high level of public trust and respect." Therefore, by VU's own established criteria, for the Brauer Museum to sell a famous artwork that had been purchased specifically for the public good to a buyer who will withdraw the painting from public view would be unethical, even if the private buyer was offering $1-million more than a reputable museum for the purchase.