WKU receives encouraging financial ratings

Moody’s Financial Strength Rating Definition

Jeremy Chisenhall

Investor services Moody’s and Standard & Poor’s, two of the three largest investment services in the U.S., have rated WKU’s financial outlook as “stable,” per their September reports.

This was a pleasant surprise for Susan Howarth, executive vice president for strategy, operations and finance at the university. WKU is currently battling declining enrollment and a budget that had to be cut by another $8.6 million this year. 

“I really went in to both rating calls thinking that, if not in a downgrade in the actual rating, I thought for sure the outlook would change to negative,” Howarth said. “Just because of the enrollment problems. And the enrollment problems are not just Western, it’s a national — it’s a demographic problem.”

The “stable” rating is based primarily on the university’s ability to adapt to its budget problems. Moody’s affirmed WKU’s A2 and enhanced A1 ratings on WKU’s general receipts bonds. It also affirmed the A3 rating on the bonds for WKU’s Alumni Square Project.

The A1 rating is the fifth-best rating Moody’s gives on a 21-level scale. The A2 and A3 ratings are the sixth- and seventh-best ratings, respectively. They are all investment grade, meaning that Moody’s has high confidence in WKU to repay its debts. 

“The university’s management team has responded to this pressured revenue and enrollment environment with a university-wide review of its academic programs, allowing WKU to better align its resources and expenses,” the report stated. “These cost reduction measures have allowed the university to maintain sound operating performance.”

The report also noted WKU has dealt with a decline in revenue, which falls in line with a decline in enrollment from 2017 to 2018, as well as an expected decline in enrollment in the Fall 2019 semester. 

“The downturn in enrollment, while it’s concerning for them, they’re seeing that we are putting together our enrollment management plan, and that we are being proactive to the demographic problem, they felt comfortable with maintaining the rating,” Howarth said.

Moody’s stated this positive outlook comes with the expectation WKU will be able to continue to implement necessary budget cuts and “maintain stable operating performance.” A failure to do so, or a failure to stabilize enrollment, could result in a downgrade of the university’s outlook. 

Howarth said she was confident in WKU’s ability to stabilize enrollment. 

Moody’s also listed other reasons for a potential upgrade and downgrade in the future:

Reasons for potential upgrade

  • Growing student demand, driving sustained increases in enrollment and net tuition revenue

  • Material growth in wealth and liquidity (cash) relative to debt and expenses

  • Sustained annual revenue growth, contributing to improved operating performance

  • For enhanced rating, an upgrade of the Kentucky Public University Intercept Program (a program that allows the state to take WKU’s state-allocated money and put it towards debt collection). 

Reasons for potential downgrade

  • Weakening of operating performance

  • Inability to stabilize enrollment, resulting in further reductions in net tuition revenue and operational pressure

  • Increase in debt without offsetting growth in wealth and revenue

  • For enhanced rating, a downgrade of the Kentucky Public University Intercept Program

Operating on a slightly different scale, Standard & Poor’s affirmed its A-/stable ratings for WKU’s general receipts bonds. It also affirmed its BBB+/stable rating for WKU’s lease revenue bonds from Warren County for the Alumni Square Project. 

Continued financial support from Kentucky was one of the reasons why Standard & Poor’s gave the stable ratings.

Editor-in-Chief Jeremy Chisenhall can be reached at 270-745-6011 and [email protected]. Follow him on Twitter at @JSChisenhall.