Moody’s downgrades Eastern’s credit rating

Analicia Haynes, Administration Editor

Moody’s Investors Service downgraded the credit rating for Eastern Wednesday night as the result of the budget impasse, which continues to suffocate public universities and pose new threats including challenges to accreditation.

Eastern’s Auxiliary Facilities System Revenue Bonds and Certificates of Participation were downgraded to below investment grade according to a statement from Moody’s.

“The downgrade is driven by Eastern’s increasing vulnerability to the ongoing state budget impasse giving its thing liquidity, declining enrollment and high reliance on state funding,” the statement read.

Teshome Abebe, an economics professor, said the downgrades in Eastern’s AFS bonds to Ba1 and COPs to Ba3 is an indication that reserves have all been thinned out.

“It is not surprising that this is the case given that the state had not provided the institution any budget for close to a year,” Abebe said.

However Paul McCann, the interim vice president of business affairs, said the downgrade may mean something to an investor but it does not affect Eastern and therefore does not matter.

“The only time it would matter is if we were planning on issuing additional bonds which we’re not and that (the downgrade) would increase the interest rate of our bonds,” McCann said. “Or if we had variable rate bonds where the interest rate on those bonds was different based upon the Federal Reserve interest rate or some standard created, but we don’t have that because our bonds are all fixed.”

Abebe said there are a few things to keep in mind when looking at the downgrade.

First, rating changes are reactionary to events on the ground, and are not an indication of future trouble or performance.

“Second, rating changes affect the perception of investors, and if people lose faith, the future interest we are likely to pay for future borrowing will likely rise as investors demand higher interest rates,” Abebe said. “This causes an increase in the amount of debt-service that the university has to plan for.”

Abebe said the downgrade does not affect the universities instructional activities so long as the institution does not pay the higher debt-service by reallocating monies away from instructional use.

“The university is very meticulous about this both at the policy as well at the operational levels,” Abebe said. “Finally, it is ironic that the state wishes to save money, but its own agencies are having to potentially pay higher interest rates in the form of debt-service should they wish to access these funds from the market place.”

McCann said in the past the university has issued both revenue bonds and certificates of participation and at the time that they issued those bonds they hired rating companies to review them and tell investors how good the investment is.

“That’s what they do so this (the rating),” McCann said.  “It’s something that goes in at the front end of any bond sale after the bonds are sold. This doesn’t really matter because we sold them (bonds) and an investor owns them.”

McCann said the university hires the service to continue rating them throughout the time and if the university desires to take out additional bonds in the future then the service would have to know where the university stands.

McCann said the university does not have any plans for issuing bonds right now.

“We don’t have anything to build and we’re not contemplating anything,” McCann said.  “The interest rate on our bonds is all fixed at 4%.”

For eight months, public universities have been left in the cold and forced to operate without a state budget.

As a result, many are forced to make the necessary decisions, including cutting personnel expenses through means of layoffs and furloughs, to continue to operate.

McCann said the bottom line is that the university needs an appropriation and said he hopes the statement does not turn kids away.

“Our cash flow is dwindling,” McCann said. “That’s what we’ve been telling everybody, that’s what we’ve been telling the legislature, we cannot run away from that we need an appropriation.”

Now, amid the already crippling budget crisis, the Higher Learning Commission sent out a letter asking universities to submit an emergency plan detailing how they will support students in case the university closes.

The HLC will use that information from the universities to determine if the university will remain accredited.

Blair Lord, the vice president of academic affairs, said each university president got their own personal letter asking to provide information so they can assure themselves that their financial criterion for the HLC was met.

Lord said Eastern’s accreditation was ensured.

Ali Moshtagh, an associate professor and chair of economics, said the downgrade also means there would be a harder time taking out loans and if the university chooses to do so then they will have to pay a higher interest rate.

“You can still borrow but they charge a very high rate,” Moshtagh said. “It is telling investors ‘if you want to lend us money be careful because we might not be able to repay you because of the budget impasse.”

Mostagh said if the budget impasse goes on then the university will not be able to repay its loans.

“It looks like there is no light at the end of the tunnel but I don’t believe the government will let us go down. I don’t think Eastern will go under or close,” Moshtagh said.

Moshtagh said education is an investment on human capital and the mind is a terrible thing to waste.

“That’s what will happen if you don’t fund higher education,” Moshtagh said. “Students are assets of the state and it pays to add to your human capital.”

McCann said this downgrade can be a big deal and just adds another log to the fire.

“It’s another indication that we need an appropriation,” McCann said. “We are going to do everything we need to do to stay in business and give students the kind of education they need in order to succeed in today’s world.”

Moshtagh said he is amazed at power of students to rally and encourages them to stay at Eastern and fight for their education.


Analicia Haynes can be reached at 581-2812 or [email protected]