Jerry Sandusky Scandal

Moody's Investors Service to review, possibly downgrade, Penn State bond rating

Penn State could see a downgrade in its bond ratings — another potential ripple effect of the Jerry Sandusky scandal and NCAA sanctions.

Moody’s Investors Service announced Tuesday that it put Penn State’s bond rating on review for a potential downgrade. Penn State currently has an Aa1 rating with a negative outlook. The Aa1 rating is the second-highest category, behind AAA. The rating applies to about $1 billion in debt, according to Moody’s.

According to an announcement from Moody’s, the potential change stems from recent events including the Freeh report, the NCAA sanctions and the Big Ten Conference action, along with the uncertainty associated with other investigations.

The NCAA announced unprecedented sanctions against Penn State on Monday, including $60 million penalty and a four-year ban from bowl games. The university is facing three civil suits, and more are expected to be filed.

The Big Ten will pull Penn State’s share of annual conference bowl revenue, costing the university another $12 million.

Moody’s expects to finish its review in 90 days. It will include assessing the affect of the reports and investigations “which collectively point directly to weaknesses in the university’s management and governance practices.”

The Freeh investigation concluded not only that there had been a cover-up of the Sandusky abuse by high-ranking Penn State officials, but that there was a culture that had allowed the scandal to develop.

The Moody’s announcement also says the review will include looking at the possible negative effects on student demand and fundraising.

Tom Kozlik, a municipal credit analyst at Janney Montgomery Scott, said an announcement that a review is under way is “common when substantial news is released about an issuer in the municipal market.”

“I agree with Moody’s in that the magnitude of the ultimate credit impact on Penn State will depend on the extent of victim claims costs. But this is likely to be spread over a multiyear period,” said Kozlik, himself a Penn State graduate.

Janney, a financial services company, is headquartered in Philadelphia.

“I have not seen important numbers such as student enrollment, applications, academic related funding and fundraising fall even though Penn State’s overall reputation has suffered,” Kozlik said. “And I do not expect these numbers to fall. The punishment from past tragic events will present some near-term financial challenges but could very well be a springboard for important change that helps Penn State in the medium to long term.”

Moody’s had put Penn State on the watch list in November after the child sex abuse charges being filed against Sandusky and perjury charges against two former administrators.

The university was taken off the list in February.

Anne Danahy can be reached at 231-4648. Follow her on Twitter @AnneDanahy