Moody's drops U. bond rating

The investment service also lowered its rating on debt issued by the Health System. The investment service also lowered its rating on debt issued by the Health System.by Laura McClureThe investment service also lowered its rating on debt issued by the Health System.by Laura McClureThe Daily Pennsylvanian The downgrades by Moody's Investor Service, which arrived just eight months after the last time the service lowered the two institutions' ratings, did not come as big a surprise to Penn officials, Vice President for Finance Kathy Engebretson said. The lowered ratings will not have a significant impact on the University or the Health System because neither institution has plans to borrow money on the market this year and the nation's current high interest rates make the differences almost negligible, Engebretson noted. But the drop does damage the University's reputation and could portend high costs for Penn on any future debt issues. Moody's downgraded the University's rating from an Aa3 to an A1, and UPHS from A2 to A3. Both were given negative outlooks, which means Moody's believes they may have to lower the ratings again in the near future. "Moody's anticipates that the University's operating performance will continue to be negatively affected by health system performance for the next several years and that as a result financial resource growth will likely continue to lag that of peer institutions," Moody's analysts wrote in their report. Approximately $350 million of the University's debt and $502 million of Health System bonds were affected by the move. Health Care System Department Chairperson Mark Pauly said although the downgrades aren't good news, they will not have harmful short-term consequences. He said the effect will be "not enough that anybody will notice it in terms of the University's overall financial health," but added that the lowered ratings are "ominous signs of things to come" if the financial situation of the Health System does not improve. In addition to the stunning deficit UPHS announced last week, the system had previously posted losses of $90 million for FY98 and recently made plans to lay off 1,700 workers by next summer in an attempt to regain financial stability. Although Moody's acknowledged the Health System's efforts to regain control of its finances, the statement warned UPHS of the dangers of laying off such a high number of employees, especially since the number of patients its member hospitals treat continues to grow rapidly. This possibility was one of the reasons that both the University and UPHS received negative outlooks along with their ratings. Engebretson said officials were disappointed by the University's negative outlook label. "A stable outlook would have been more appropriate because I really don't see our rating going below this level," Engebretson said. Moody's said it downgraded the University's rating because of it's "strong linkage" to UPHS, despite its otherwise positive financial situation. Engebretson said this tie, although reasonable since the Health System makes up over 55 percent of the University's budget, is frustrating for the academic side of the institution. "So many things are going right here and the rating doesn't really capture that," Engebretson said. "[We're] doing everything right but it still isn't enough to counterbalance the Health System's problems." Moody's said that the University's efforts to attract students have increased enrollment -- a growth that the firm said places Penn "among the most prestigious in the country." However, analysts also pointed out that while the University's peer institutions have been strengthening their financial positions over the past years, Penn's has not had the opportunity to do the same in part because of the Health System's financial difficulties. Yet Engebretson pointed out that the differences between the financial cushions of Penn and its peer institutions are not based solely on UPHS. The University's approximately $3 billion endowment is significantly lower on a per student basis than the other institutions, leaving it with less chance for as large financial gain. She added that Penn has also invested a lot of money in construction in recent years, while other schools might be putting that same money in their endowments instead. A spokesperson from Standard and Poor's, another bond-rating agency, said they have not taken any action to re-evaluate either Penn or the Health System since their last evaluation in July. That evaluation lowered UPHS to an A rating while maintaining the University's Aa2 level since the company looks at each institution independently.