Moody's warns on Penn State recruitment, funding woes

UPDATE (with analyst comment at the end) How much will it cost Penn State to lose its lucrative reputation as Football U?  Moody's Investors Service says today that three factors:

- The NCAA's Nittany Lion football program downgrade and five-year, $60 million fine;

- ex-FBI boss Louis Freeh's damning report on dead coach Joe Paterno's and ex-Penn State president Graham Spanier's failures to stop child-raping ex-staffer Jerry Sandusky; and

- "uncertainty about future risks emanating from several other investigations at the state and federal level"

... all create "potential negative implications" for Penn State's "student demand and fundraising" and thus for its ability to keep paying its creditors on time.

So Moody's is weighing whether to cut Penn State's Aa1 bond rating on $1 billion the university owes investors. Lower ratings typically mean higher borrowing costs. That would squeeze Penn State's expansive budget, which already charges higher tuition than many other state-subsidized U.S. colleges.

The rating agency says it will decide whether to cut the rating by October.

The size of the financial cost "will ultimately depend on the extent of victim claim costs," spread across "a multi-year period," agreed Tom Kozlik, municipal bond analyst at Janney Montgomery Scott in Philadelphia.

Besides the cost and lost income at Penn State's sports programs, "we have not seen important numbers such as student enrollment, applications, academic related funding, and fundraising fall, even though Penn State's overall reputation has suffered. And we do not expect these numbers to fall," Kozlik added.

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