DURHAM — N.C. Central University's credit rating has been downgraded.
Moody's Investors Service, a major credit rating agency, has moved NCCU's bond rating down one notch from A2 to A3. Despite the downgrade, the agency classifies the university's outlook as "stable."
In a report Wednesday, Moody's said the downgrade "reflects the University's thinning financial resources and low monthly liquidity, recently pressured operations with deep reductions in appropriations and very little headroom" on $19.9 million in foundation debt related to the Eagle Landing housing project.
NCCU is the first UNC campus to have its credit downgraded during the financial squeeze and state budget cuts. Recently, Western Carolina University's outlook was shifted from "stable" to "negative," but that move stopped short of a downgrade.
Charles Perusse, vice president for finance at the UNC system, said the NCCU downgrade occurred in the course of a periodic review by Moody's. He explained that last year, Moody's recalibrated, putting all borrowing entities on an equalized scale of rating. As a result, each UNC campus moved up one step in the ratings at that time.
So essentially, Perusse said, the downgrade puts NCCU back to where it was a year ago.
"From an operational standpoint, this has no impact on any existing debt that Central has," Perusse said.
In the report, Moody's said NCCU has $88 million in outstanding debt. Among the university's challenges, the agency says, is that NCCU tapped its reserves in the past five years to upgrade housing and dining facilities. Moody's also cited "steep cuts in state appropriations," including a reduction of 15 percent in the current year. At the same time, enrollment has flattened as NCCU seeks to strengthen the academic profile of its students.
May hurt borrowing
The change in the rating has no effect on NCCU's current budget, but it could make borrowing more expensive in the future. The Moody's report mentioned that NCCU is in the initial planning stages on two capital projects - a $40 million residence hall that may begin construction in 2012 and a roughly $50 million student union that has no projected start date.
But the report noted that NCCU has cut expenses and managed a near break-even operating budget in 2010 after several years of operating deficits.
"The impact is essentially this: going forward, although the cost of capital may increase, the good news with the downgrade is that we have a stable outlook," Wendell M. Davis, NCCU's vice chancellor for finance and administration, said in a statement. "This is a vote of confidence in NCCU's future. Despite the deep cuts from the state, the rating agency believes we are in a good position for recovery."
Perusse said the downgrade was unexpected. UNC finance staff will closely analyze the report to determine whether other campuses could face a similar outcome. "It's definitely something we're paying strong attention to," he said.
Credit ratings have been closely watched as the economy has faltered. This month, Standard & Poor's downgraded the United States' rating for the first time in history.
"We're in a different economic situation right now, and all the financial statements and reviews are becoming more strict and more comprehensive," Perusse said.
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