Moody’s cites $32 million in Henderson State's debt; bond ranking stays at A3

Moody's Investors Service has downgraded Henderson State University's financial outlook from stable to negative.

The New York company said its action, taken Tuesday, "reflects approximately $32 million of outstanding rated debt." Moody's also cited the Arkadelphia university's "continued deficit operations through fiscal 2018 with additional use of reserves to cover expenses."

Moody's affirmed its previous A3 rating for Henderson's outstanding secured bonds which the university used to finance capital projects, including the acquisition and renovation of residence halls and campus apartments.

Henderson board Chairman Bruce Moore said Wednesday that the news was "obviously ... disappointing."

"But I think that's been somewhat consistent in higher education recently," Moore added. "[Moody's] affirmed our credit rating, which is the most important aspect."

Chelsea O'Kelley, Gov. Asa Hutchinson's press secretary, said in an email that the governor "is looking into this, but we will defer to the university and the board of trustees for comment."

Brett Powell, Henderson's vice president for finance and administration, said that "Moody's has generally cast a negative outlook for universities in 2018 due to slow revenue growth across the sector." But Powell said the university was "encouraged by the affirmation of our current A3 rating."

The A3 rating is the lowest of Moody's A ratings but above the company's B and C ratings. An A rating has three levels from 1 to 3 and suggests the debtor's "obligations are judged to be upper-medium grade and ... subject to low credit risk."

Henderson, which had 3,336 students in the fall 2017 semester, has seen declining enrollment in recent years and entered fiscal 2018 with a $3.2 million deficit. In May, the school's board approved a balanced budget for fiscal 2019.

Henderson trustee Brown Hardman said that Moody's negative outlook is concerning.

"We need, as a University, to know exactly what that means and how it negatively affects Henderson State," Hardman said in a text message.

In its report, Moody's wrote, " The university's liquidity has declined significantly since fiscal 2013 and although the university forecasts for balanced operations beginning in fiscal 2019, operating margins will remain thin. The thin performance means material improvement in liquidity levels is unlikely and some capital expenditures will be deferred.

"The university's core student market remains highly price sensitive and this limits potential revenue growth from the university's largest revenue source, tuition and fees. Positively, management indicates an increase in student demand for the upcoming academic year," Moody's added.

Moody's said Henderson is forecasting its fall 2018 entering freshman enrollment at about 750 students, above last year's 617.

The university also is pursuing efforts "to spur enrollment growth," and "is launching several high-demand nursing programs including a masters of science in nursing" for the upcoming fall semester, Moody's wrote.

"Additionally, the university is in the development stage of several online programs and has recently entered into an international student partnership to expand its recruitment focus," Moody's said.

As of June 30, 2017, Moody's said, Henderson reported $7 million "in monthly liquidity which translates to just 48 days cash on hand and is materially below the A3 median of 105 days."

"Moving forward, management's ability and willingness to control expenses will be critical to the success of the budget projections and slow rebuilding of wealth and liquidity levels," Moody's wrote.

State Desk on 06/28/2018