Penn State abuse scandal, penalties give Moody's pause

Tue Jul 24, 2012 2:49pm EDT

Penn State football players leave the Lasch Football Buliding following a team meeting after the announcement of the NCAA penalties and sanctions on the Penn State campus in State College, PA July 23, 2012. REUTERS/Craig Houtz

Penn State football players leave the Lasch Football Buliding following a team meeting after the announcement of the NCAA penalties and sanctions on the Penn State campus in State College, PA July 23, 2012.

Credit: Reuters/Craig Houtz

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(Reuters) - Moody's Investors Service said on Tuesday it may cut its Aa1 rating on Pennsylvania State University's $1 billion worth of outstanding debt one day after two college athletic conferences fined the school in connection with a child sex abuse scandal.

The scandal that rocked Penn State's top-tier football program led to several investigations, which "collectively point directly to weaknesses in the university's management and governance practices," Moody's said in a statement.

The rating agency said it was concerned about a report by former FBI director Louis Freeh, whose probe focused on the apparent failure of Penn State's board and management to properly investigate allegations against ex-assistant football coach Jerry Sandusky. Sandusky was convicted in June of sexually abusing 10 boys over 15 years.

Other state and federal investigations are continuing, Moody's noted.

In its 90-day review, Moody's will also look at potential negative implications for the university's student demand and fundraising efforts, neither of which appeared to be weakened before the sanctions were issued.

Moody's acknowledged that though the time frame for its review was short, impact from the scandal was likely to develop over several years.

The governing body of U.S. college sports, the National College Athletic Association and the Big Ten Conference of college sports together fined Penn State about $73 million on Monday.

MUTED REACTION ON THE MARKET

Other rating agencies are taking a measured approach to the latest fallout from the scandal. Standard & Poor's Ratings Services said on Monday that the penalties won't have an immediate impact on its ratings of Penn State's debt.

S&P's long-term ratings on Penn State's various revenue bonds is AA with a stable outlook.

"We view the initial impacts of the NCAA penalties... as having a minimal impact on financial resources and annual operations," S&P said in a statement.

The school raised nearly $4.6 billion in revenues in fiscal year 2011.

S&P remains concerned, however, because the scope of Penn State's liability hasn't been fully identified yet, it said.

Reaction to Penn State's punishment in the U.S. municipal bond market was muted, analysts and traders said.

"It is doubtful that there will be fallout from the PSU 'near death experience' expressed in bond prices," said Van Eck Global chief municipal strategist James Colby.

For example, the price of Penn State's 30-year maturity issued in 2010 has climbed steadily from $106 at the start of this year to nearly $112.70 as of the market close yesterday, Colby said.

"Dealer bids are well within the typical spread range for a long bond like this," he said.

(Additional reporting by Caryn Trokie; Editing by James Dalgleish and Leslie Gevirtz)

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