NIC ‘dysfunction’ causes rating downgrade
COEUR d’ALENE — A bond credit rating company has revised North Idaho College’s rating outlook to negative while affirming the college’s A1 issuer and A2 revenue bond ratings.
Moody’s Investor Services cited governance and management challenges that continue to weigh on NIC’s strategic position, including enrollment outlook and the upcoming accreditation review, as reasons for the change.
The revision of North Idaho College’s outlook from stable to negative reflects governance credibility and board structure risks, according to a news release from Moody’s.
The rating company pointed to public disputes between board members and with college leaders, including the dismissal of former college President Rick MacLennan without cause and complaints against the actions of the board.
“These risks are highlighted by board dysfunction, with a small group of publicly elected board members and significant turnover at key senior leadership positions,” the news release said.
In an email to colleagues, NIC Vice President for Finance and Business Affairs Chris Martin called the outlook change disappointing but not surprising.
NIC had $8.2 million in outstanding debt as of June 30, 2021.
Martin and Sarah Garcia, interim vice president for Finance and Business Affairs, met with Moody’s in November to review the ability of the college to repay the bonds.
Issued by the Dormitory Housing Commission of North Idaho College, the bonds have a final expected maturity in 2045.
Mic Armon, a commissioner on the Dormitory Housing Commission for NIC, said bond agencies look for changes within an organization since the last time it was reviewed.
A negative outlook is typically a precursor to another review, examining how safe the bonds are, with a possibility of downgrading the bond ratings.
A bond rating is a grade given to bonds that indicates their credit quality.
Independent rating services like Moody’s provide these evaluations of a bond issuer’s financial strength, or its ability to pay a bond’s principal and interest in a timely fashion.
Armon said the quality of bonds can remain high even while an outlook is negative, adding that NIC’s ability to pay is high.
“In this case, I would say there’s not a high probability that the bonds are going to be downgraded to a lower rating,” he said Friday.
Moody’s said its affirmation of NIC’s A1 issuer rating reflects the college’s regional role as a provider of two-year education in North Idaho, as well as healthy operating performance, growing wealth and manageable leverage.
For fiscal year 2021, total cash and investments of $69.5 million cover debt and expenses a strong 8.5x and 1.2x respectively, Moody’s said in the news release.
Unrestricted monthly liquidity of nearly $26 million provides an adequate 167 days cash on hand.
“These financial strengths, in addition to remaining institutional aid from the federal government, provide the college with some stability as it seeks to stabilize enrollment amid ongoing governance issues,” a news release said.
Affirmation of the A2 student fee revenue bond ratings incorporates the college’s general credit characteristics, as well as specific considerations, including a limited pledge of specific student fees and auxiliary revenues and active management of the pledge.
Armon said organizations like Moody’s look for changes such as governance and management challenges, leading to a negative outlook.
Moody’s also looks at financials — and at this time, student fees have continued to be adequate to make the payment on the bonds. The college’s financial position is why the bond rating did not change.
“The (negative outlook is) a little bit of a red flag to start saying, ‘Maybe we need to keep a little closer eye on this,’” Armon said.
Factors that could lead to an upgrade of the ratings include:
• Significant growth in financial reserves, including unrestricted liquidity
• Material strengthening of market position, including successful stabilization of governance and management combined with increasing student demand
Factors that could lead to a downgrade of the ratings include:
• Continued governance and management disruption leading to accreditation concerns, enrollment declines, inability to execute on strategic initiatives, or weakening of operating performance
• Material spend down in reserves beyond current identified capital plans
• For the student fee revenue bonds, inability to sustain stronger annual debt service coverage above 1.25x without use of reserves
If bond ratings go down, the quality of the bonds issued will also drop, Armon said.
The cost of borrowing would rise, he said. Also, fewer people want to buy lower-quality bonds.
“The fact that the college retained its A1 rating in the midst of the current challenges is awesome and truly a testament to the strong fiscal stewardship of the board and Sarah Garcia and her team,” Martin said.
