Debt Costs Amherst College Its AAA Rating From S&P, but Not From Moody's

September 21, 2012

[Updated (9/21/2012, 8:39 p.m.) with news that Moody's Investors Service had kept Amherst College's AAA rating.]

Amherst College's bond rating was downgraded a notch on Thursday by Standard & Poor's Ratings Services, which said the institution's "very high" debt burden was out of step with that of other wealthy liberal-arts colleges. But on Friday, Moody's Investors Service opted to retain Amherst's AAA status, while signaling similar concerns about debt levels.

S&P's lower rating, AA+, indicates that Amherst still has a strong capacity to meet its financial obligations, according to the credit-rating agency.

While Moody's did not cut the college's bond rating, the agency maintained a "negative outlook" declared earlier this year.

The S&P downgrade was triggered by Amherst's expected issuance of $100-million in taxable bonds in the coming weeks, a step that would raise the college's debt to $412-million. The debt has grown considerably in the last decade, and the college's high level of variable-rate debt "is a credit risk, in our opinion," S&P said.

With the addition of the new $100-million bond issue, Amherst expects to pay $21-million annually, or nearly 12 percent of its 2011 operating budget, toward debt service from the 2014 to the 2035 fiscal years. That is almost twice the median percentage of operating expenses devoted to debt for all colleges and universities rated AAA by S&P, according to analysts at the agency. The list of AAA institutions, however, includes major research universities with significantly larger operating expenses.

About 80 percent of Amherst's new debt is expected to help finance a $244-million science center, whose construction has been delayed by the economic downturn.

"While we're disappointed in the downgrade, the science-center project is very important to the college," Shannon D. Gurek, Amherst's interim treasurer, said in a written statement on Friday. "We believe we've done very well preparing to finance it, by setting aside internal funds, through fund raising, and by issuing debt. In the long term, we're confident this will be a positive strategic move for the college."

Given its robust fund-raising record, selective admissions, and $1.64-billion endowment, Amherst still occupies a rarefied position among liberal-arts colleges. Moody's cited the college's "extremely strong balance sheet" in its assessment of Amherst, and the college's enviable financial resources were echoed in S&P's report.

"It's still a very strong institution, and one of the stronger institutions in the AA category," said Nick Waugh, primary credit analyst for the S&P report.

The downgrade comes at a time of transition for Amherst, where Carolyn A. (Biddy) Martin, a former president of the University of Wisconsin at Madison, took the helm a year ago. The college's longtime treasurer stepped down this past spring, and a search is under way for a provost, which will be a new position at Amherst. A new board chair was named in July.