Moody's downgrades K-State Athletics' credit outlook to 'negative' in debt refinancing

Mar. 5—K-State Athletics Department's credit outlook has fallen, but an official says the change was part of a strategic refinancing move that was good for the department.

Moody's Investors Service, an independent credit rating agency, on Wednesday changed the outlook on $19 million of proposed revenue bonds from stable to negative amid a $25 million drop in revenue during the last fiscal year.

But K-State Athletics chief financial officer Jim Bach said the change was an expected part of a plan to refinance debt to save the department money. Bach said the department used furloughs and salary reductions to offset revenue losses after the coronavirus shut down many sporting events and cut ticket sales. The department also decided to refinance a portion of its $58 million in public bond debt, which came from building the West Stadium Center.

"When you go through that process, one thing you have to do is you have that credit rated," Bach said. "And in a sense, we were glad, because they didn't change our credit rating. It went from A1 with a stable outlook to A1 with a negative outlook. ... The fact that we ended with A1 is kind of the best case we could hope for."

Bach said that because the refinancing took place midyear, they had to provide estimates for how the rest of the year would look, and those were affected by a number of factors.

"It was kind of a in some respects, a voluntary action to have some things rated," Bach said. "We wanted to do what we felt was the prudent action (to refinance)."

Bach said the move will save the department about $9 million over three years in debt repayment. The refinancing adds eight years to the debt repayment schedule (from 12 years to 20 years), and the university will pay about $8 million more total.

The $19 million is for taxable Athletic Facilities Refunding Revenue Bonds, to be issued by the Kansas Development Finance Authority.

Moody's said the outlook change was driven by ongoing pandemic-related business disruption, "which will result in significant revenue declines and material operating performance contraction for fiscal 2021," the report reads. "While management continues to take actions to adjust expenses, the magnitude of reductions will be insufficient to fully offset the decline in non-capital revenue of an estimated $25 million for fiscal 2021," the ration action reads.

Proceeds from the proposed Series 2021C bonds will be used to refund the majority of the serial maturities associated with previous bonds to provide for near-term budget relief. Under the proposed structure, annual debt service payments for fiscal 2022 to fiscal 2025 will be about $2.8 million, which is $3 million lower per year compared to the current schedule.

Moody's provides international financial research on bonds issued by commercial and government entities. In Moody's investment grade system, Aaa is the highest, then Aa 1, 2 and 3, and then A 1, 2 and 3. The lowest is C. B and C ratings usually are considered bad investments. Ratings can affect future interest rates.

The report also said K-State Athletics' strong connection to Kansas State University, which is rated Aa3, and its strong brand work in its favor. Financially, K-State Athletics operates as a separate, not-for-profit entity, but it is also a department of the university and is subject to the university's regulations.

K-State Athletics in the last three years has been working on an initiative to build $105 million in facility enhancements, including a $25 million indoor football practice facility.

Bach said those things are still on the agenda.

"We're still proceeding with conceptual design," he said. "Circumstances are going to make us look at things more conservatively than we have in the past. There's still a lot of excitement and interest."

He said when he and other officials were planning the refinancing, they made sure to set the repayment schedule in a way that would allow the department to be flexible and wouldn't overextend the budget.

Bach said it will take a while for the department to recover from the effects of the pandemic, but things are looking up.

"A lot of it comes down to donor support and the fact that we'll be back to normal in the fall," he said.