A recent article in The Birmingham News reported that $31.7 million in debt held by Birmingham-Southern College was being dropped to junk bond status by Moody's Investor Service. BSC's rating now stands at Ba1, two steps down from Baaa3.
Students may not be familiar with those terms, but the bottom line from Moody's, a widely used credit and risk analysis company tracking debt on thousands of entities, claims, "The downgrade reflects deep and continuing operating deficits during a period of major restructuring, expected continued decline in unrestricted financial resources and a competitive student market environment which could hamper plans to increase enrollment and tuition revenue." According to Kim Thrasher, Vice President of Finance at BSC, this rating has absolutely no effect on the College.
"Bonds are a way to raise money by selling debt in the public markets that people can trade.
Bonds are not tied to the specific operating performance of an entity like stocks are, but they do get rated," Thrasher stated. "This will have no effect on our institution. The only potential impact would be that we might have to pay a higher interest rate if we decided to take out more publicly traded bonds, which we are not planning on doing." Dr. Pollick told The Birmingham News that the downgrade of our debt would make it more difficult for the College to borrow money, but he also said that BSC has no plans to borrow and the downgrade will have no effect on the way the college operates.
"It doesn't change anything we are doing," Dr. Pollick told the newspaper, reiterating Thrasher's comments.
The news from Moody's was not all negative, however. Unlike past reports which gave BSC's credit rating a "negative outlook," the most recent report described the outlook as "revised to stable at a new level." The investor service concluded on a positive note that the College's increase in admissions applications is a possible indication of progress.
In addition, Moody's mentioned BSC's large endowment of $125 million at the end of fiscal year 2006 and the recurring donor support each year. Moody's also recognized BSC's decision to compete in Division III athletics as an acknowledgement of its problems and a big step in the right direction.
The article in The Birmingham News also stated that BSC hopes the addition of football and lacrosse will expand enrollment and interest in the college. It was also noted that this decision will require a large investment in the athletic facilities but explains that BSC will borrow from its endowment to pay for the plan. Further commenting on the borrowed money from the endowment, the article reported that where colleges normally only spend about five percent of their endowment values each year, BSC has spent more than that each year and anticipates spending between 11 and 14 percent for the next several years.
The extent to which this borrowing will diminish BSC's endowment is dependent on the performance of the College's investments. In 2006, BSC's returns on its investments was 10.7 percent according to The Birmingham News.
The publication also quoted BSC officials as saying that the significant withdrawals from the endowment were "necessary for growth and stability." Dr. Pollick also stated that the amount of admission applications received in mid- February is 61 percent higher than the same time last year. This increase definitely is a sign of growth.
The plan to turn the rating around will take some time, Thrasher said. However, she makes it clear that there is a distinct plan.
"We are making strategic use of funds from endowment. Good, bad, indifferent, it takes money to make things happen. All of this is to enhance who we (BSC) are."