Changes to Standard & Poor's Global Rating Services Review of Drexel
June 9, 2023
In previous messages we have addressed the post-COVID challenges affecting higher education, which include a volatile economic climate and heightened scrutiny of our sector. Despite these challenges, Drexel has made key academic and student-focused investments while still achieving modest positive operating results, including last fiscal year’s positive $2.7 million margin.
However, in response to uncertainties in our sector, Standard & Poor’s Global Rating Services (S&P) has made changes to its rating methodology for higher education that impact Drexel’s credit ratings. In reviewing the financial results of colleges and universities, S&P has narrowed its focus from all Changes in Net Assets from Operating Activities to an institution’s Change in Assets from Operating Activities Without Donor Restrictions. For Drexel, this change means that S&P’s recent review of our fiscal year 2022 results did not focus on the University’s positive operating margin of $2.7 million. Instead, by removing the Operating Results with Donor Restrictions category, which achieved a positive margin of $13.2 million, S&P considered only the narrower category, where Drexel recorded a negative margin of $10.5 million.
In addition, with the implementation of a recent lease accounting change, rating agencies now consider operating leases as debt and contingent liabilities.This change has been made across industries.Historically, only financing (capital) leases, long-term bonds, mortgages and bank debt were included in the debt service analysis by rating agencies. This change poses a significant challenge for land-locked urban institutions, such as Drexel, that need to lease space to meet their needs for student and program growth.
These changes and their adverse impact are not unique to Drexel. S&P has issued numerous rating downgrades in recent years due to the slowing economy. Over the last year alone, more than 25 universities were downgraded, and many more experienced downgrades the year before.
As a result of these changes, today S&P revised its long-term rating and underlying rating on bonds issued for Drexel one level from “A-” to “BBB+,” while maintaining the University’s “Stable” outlook. While disappointed in this outcome, we are heartened that the rating change is primarily due to a change in criteria --- not Drexel’s performance. In its assessment, S&P cited the following strengths for the University: our sizable enrollment, the quality and geographic diversity of our student body, the mix of undergraduate and graduate students, improvements in our retention and graduation rates for fall 2022, and our continued focus on executing the strategic plan. It is important to note that Drexel’s rating from Moody’s Investors Service remains at A3, with a Stable outlook.
We recognize that we have more work to accomplish over the next five years to achieve balanced budgets based on positive operating results without donor restrictions. As we continue to balance the budget for FY23 and FY24 while confronting the ongoing challenges facing all of higher education, we remain committed to implementing a comprehensive plan for financial stability and margin improvement with both short- and long-term goals. We have been and will continue to pursue opportunities for expense reductions and enhanced efficiencies in both our administrative operations and academic programs. We also will continue to pursue opportunities to grow revenue through enrollment, partnerships and fundraising. To provide additional technical assistance and project management capacity, we have engaged Huron Consulting Group, which will begin collaborating with teams across the University on a series of expense-reduction and revenue-growth efforts.
It is imperative that we work together to bring the University’s expenditures into alignment with current revenue targets, which remain conservative as we address market challenges. For the remainder of this fiscal year and into FY24, we ask that all units continue to exercise restraint, limiting hiring to essential positions only and refraining from any non-essential spending. If you have any questions, please do not hesitate to contact your HR Business Partner, Procurement Services, your Budget Office representative, or the Provost’s Office of Finance and Administration.
We are proactively taking many steps to ensure Drexel is well-positioned for the future through the implementation of the Drexel 2030 Strategic Plan, including the work of the University Advisory Committee on Academic Structure and the definition and activation of plans to support the Areas of Excellence and Opportunity. We are fully confident that we will work through these challenges together.
Helen Y. Bowman
Executive Vice President, Treasurer and Chief Operating Officer
Paul E. Jensen
Executive Vice President
Nina Henderson Provost