Moody’s Investors Service has downgraded Longwood University’s issuer rating twice since July 26, 2016, with the latest announcement coming Dec. 14, 2017, noting that the service had changed the school’s rating to A3 from A2 and refrained from listing a stable outlook.

Longwood Assistant Vice President for Communications Matthew McWilliams said the university believes these actions reflect both a negative outlook on higher education in general that does not apply to Longwood and a likely misinterpretation of Longwood’s financial dealings.

He also said the downgrades do not have a meaningful effect on Longwood because the university does not issue bonds directly, and he asserted that the school is in strong financial condition.

He noted that an issuer rating by one of the rating agencies, like Moody’s, gives investors a sense of the financial strength of an institution that is issuing bonds and saw the downgrade for Longwood as reflective of broader concerns that have little bearing on the school in particular.

“Chiefly because of potential changes in federal policy, Moody’s is pessimistic about higher education altogether and issued a report about that earlier this month,” he said in December.

That prior report, published online Dec. 5, stated that Moody’s “is revising the 2018 outlook for U.S. higher education to negative from stable as aggregate operating revenue moderates while expense growth increases. The outlook indicates the credit rating agency’s expectations for fundamental business conditions over the next 12-18 months.”

In the same report, Moody’s Vice President Susan E. Shaffer said, “The annual change in aggregate operating revenue for four-year colleges and universities will soften to about 3.5 percent and not keep pace with expense growth, which we expect to be almost four percent. Excluding academic medical centers, sector-wide revenue growth is projected to be under three percent for the outlook period.”

McWilliams noted that federal tax policy especially concerns Moody’s, but he added that possible changes in federal tax policy, such as charging very large endowments or forcing graduate students to pay higher rates, would not have much bearing on Longwood.

“We are confident Longwood will continue to do well,” he said.

In the Dec. 14 report, Moody’s gave its ratings rationale, stating that the downgrade of Longwood’s issuer rating to A3 “reflects the university’s structurally imbalanced operations for fiscal years 2016 and 2017, with a substantial use of reserves that has brought liquidity to under 70 days cash on hand from 162 days in fiscal 2015.”

Saying that Moody’s was painting with a broad brush, McWilliams gave some detail on what the investors service might have misinterpreted about Longwood’s financial dealings.

“Longwood has had, and will have, a strong and balanced operating budget,” he said. “Moody’s does not distinguish between operating expenses on the one hand and construction (or ‘capital’) expenses on the other. Longwood has been making long-planned investments in construction that are one-time expenses, which Moody’s likely misinterpreted as ongoing operating expenses. While there are challenges out there for higher education, Longwood is very confident in our overall financial picture.”

In Moody’s ratings rationale, it stated that while “prior expectations included some operating performance softening and use of reserve for fiscal years 2016-17, the magnitude of the declined exceeded those expectations.”

“Further challenges stem from its highly-leveraged debt profile, which includes $125 million issued by the associated Longwood University Real Estate Foundation (LUREF) for the majority of Longwood’s housing stock,” the report stated. “Complexities of the LUREF debt structure, a recent $93 million increase in debt for housing renovations and university housing support agreements add considerable risk elements to Longwood’s credit profile.”

The report from Moody’s also stated that the investors service’s further review of Longwood “will focus on the university’s prospects to sustainably balance financial operations given weak liquidity and recent operating performance within a highly competitive student demand environment. The review will further include an evaluation of the LUREF incremental debt, particularly with respect to the university’s ability to weather any shortfalls that would need to be absorbed by Longwood.”

McWilliams said the LUREF manages several off-campus housing units and other buildings used by the university.

“The (LUREF) is involved in a number of the important projects underway on campus, including the Curry/Frazer renovations that will begin in earnest immediately after graduation,” he said.

He later reiterated that Longwood believes Moody’s downgrades reflect the investors service’s general negative outlook on higher education and its likely misinterpretation of Longwood’s long-planned deployment of cash reserves for buildings and other long-term investments that will attract and benefit students. He said these deployments are different from endowment and tuition funds used for operating expenses.

“While Moody’s has taken note of that decrease in cash reserves, it has not distinguished between one-time expenses and operating expenses,” he said. “Regardless, Longwood is and will continue to be in excellent financial shape as investments including the new University Center, Student Success Center, Curry and Frazer remodeling, the new academic building and the new admissions building take shape.”

McWilliams noted an A3 rating actually underscores Longwood’s strong financial condition.

“The endowment and assets of the Longwood University Foundation have grown by 26 percent over the past five years, from roughly $67 million to roughly $85 million,” he said. “Enrollment has also increased over that time, with applications breaking records. There are certainly clouds for higher education overall, but Longwood is in strong shape.”

McWilliams offered interpretation of Moody’s ratings system and how it applies to Longwood.

“Longwood does not issue bonds directly but has gone through the process of maintaining a rating just as an indicator of financial strength,” he said. “For Moody’s, an ‘A’ rating for an institution means that an investment in the bonds of that institution is an investment that is ‘upper-medium grade and low credit risk,’ and an A3 rating simply indicates ‘the lower end of that generic category.’ An A3 rating is a strong rating, and perhaps just 20 percent of all colleges and universities nationwide would qualify for a rating of A3 or better.”