Credit rating agency Standard & Poor’s revised Penn State University’s credit outlook to negative yesterday, citing financial liabilities resulting from the Sandusky scandal as the primary reason for long-run credit concern.
Standard & Poor’s cited the “uncertainty and potential magnitude of financial liability” of pending litigation and other expenses related to the Sandusky scandal as primary indicators of potential credit deterioration. S&P also listed decreasing state funding, higher tuition costs, declining enrollment, and greater capital needs as additional financial concerns for the university.
This downgrade in credit outlook follows a similar announcement by Moody’s Investor Service, another credit rating agency that announced a 90-day review of Penn State’s financial outlook in July immediately following the release of the Freeh Report.
At the time, S&P had released a statement saying that “the initial impacts of the NCAA penalties” would have a “minimal impact on impact on financial resources and annual operations.” Indeed, Penn State bonds saw no real reaction from the U.S. municipal bond market immediately following the NCAA’s sanctions — Van Eck Global chief municipal strategist James Colby told Reuters then that “It is doubtful that there will be fallout from the PSU ‘near death experience’ expressed in bond prices.”
However, S&P had expressed concerns in July as to the scope of Penn State’s liability, which have apparently been realized now in the form of an outlook downgrade from stable to negative.
It’s worth noting that S&P still rates Penn State’s bonds at AA–the third highest long-term credit rating–given Penn State’s “strong financial management and low debt levels.” It’s also worth nothing that ratings by credit agencies are to be taken with a grain of salt — investors largely ignored the United States’ credit downgrade to AA+, while critics of agencies are quick to remind readers and listeners that Enron was rated AAA — the highest investment grade — four days before it declared bankruptcy.
Whether a change in credit outlook is significant or not, the agencies are at least correct in one regard: the fallout from the Sandusky scandal will come in waves for years to come.