November 12, 2011 / 12:06 AM / 6 years ago

UPDATE 1-Moody's considers credit downgrade for Penn State

BOSTON, Nov 11 (Reuters) - The child sex abuse scandal at Penn State University reached Wall Street on Friday, with ratings agency Moody’s warning of a possible credit downgrade, which would push up borrowing costs for the prestigious university.

“Over the next several months, Moody’s will evaluate the potential scope of reputational and financial risk arising from these events,” said Dennis Gephart, a senior analyst at Moody‘s.

Penn State’s roughly $1 billion in debt is currently rated Aa1, reflecting very strong student demand and other credit strengths at Pennsylvania’s flagship state-run university.

Moody’s cited the school’s strong academic brand, which it said has “improved substantially” over the past few decades, and its ability to draw out-of-state students who pay higher tuition rates.

Graham Spanier, who was asked to step down as president, is recognized for having lifted the university’s academic reputation during his 16 years at the helm.

Moody’s said it is watching a number of factors that could come out of the scandal centered on Jerry Sandusky, the former assistant football coach to the Nittany Lions who has been charged as a serial pedophile, and school officials who were made aware of the alleged abuse but did not alert police.

The fear is that the scandal could drive away students and faculty and negatively impact donor giving.

The possible negative effects on Penn State’s considerable fund-raising muscle will be “a major risk area that we are going to be assessing,” John Nelson, a managing director at Moody‘s, told Reuters.

“The effects of these events on their reputation in terms of student demand, in terms of donor support and faculty recruitment in the research field” will be closely watched.

In higher education giving, “typically 90 to 95 percent of the gifts come from only 5 to 10 percent of the donors,” Nelson said, which puts the spotlight on high net-worth alumni donors.

In 2010, about $185 million was contributed to the university’s endowment fund, according to Moody‘s.

The overall revenue base of the university was $4.3 billion in 2010, Gephart said. Only about 2 percent of that came from the popular football program, he said.

The largest component -- about 40 percent -- comes from student tuition and fees, with 24 percent from operations of the university’s hospital and 22 percent from research grants and contracts from the government and private corporations.

Other factors that will come under watch by Moody’s include potential lawsuits and settlements and significant management or governance changes.

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