The University of Alaska is making headlines due to the governor’s veto of a significant portion of its revenue stream.
Though the higher education sector continues to face negative pressure, SNW believes the potential financial crisis affecting this university is an isolated event. Such drastic funding cuts and possible financial and rating deterioration does not represent the broader higher education universe.On July 2nd, Moody’s placed the A1 rating of the University of Alaska on review for downgrade. Moody’s review is driven by the governor’s line item veto, which reduces the University’s state funding by 41%. A special legislative session will begin in early July in which the legislature will have the opportunity to override the governor’s actions. Several factors go into rating reviews, including the ability and willingness to adjust expenses to maintain fiscal health. After considering all credit factors, including legislative actions, the Moody’s rating action on the University of Alaska could be multi-notched.Given the decade long deterioration on the University of Alaska’s rating, the review for downgrade isn’t surprising. That said, SNW believes state funding cuts that lead to possible multiple notch rating downgrades is certainly a unique situation. The University of Alaska is more susceptible to changes in state appropriations for revenues than other universities, given nearly 50% of its operating budget is supported by the state. To put this in perspective, Moody’s median appropriation for all public higher education universities is 24%. Furthermore, there is a decline in Alaska’s high school graduate rate, affecting demand and the associated revenue stream. This pressures the operations of the University of Alaska and makes it more susceptible to the fiscal and economic condition of the state (and its volatile energy sector dependence).Despite this negative higher education headline and the challenges facing the sector, SNW believes both private and public university bonds offer value after careful analysis. Higher education institutions with the greatest rating defensibility are typically sizeable state universities with diverse revenue streams and large student populations. SNW will continue to monitor the higher education sector to find bonds that offer the most stability and value.Related: Why Risk Assets Are Not Reacting Dramatically to the Inverted Yield Curve
Source: Bloomberg, Moody’s, Newsweek