Moody’s Downgrade Watch: Penn State is in Trouble Financially

On Friday, Moody’s Investor Services (NYSE:MCO) put Penn State University’s revenue bond rating under review for a potential downgrade.

This came at the end of a tough week for the proud school with news of an alleged sex scandal with a past Penn State football coach and children. The school sat at the front of the news cycle for the week and by Saturday, it saw the loss of its president, longtime football coach and the school’s perfect football conference record.

The university may also see possible lawsuits from the coach’s victims.

From Moody’s (NYSE:MCO) news, it noted that the university has $1 billion in rated debt. In response to its review, the rating agency said the following:

“Over the next several months, Moody’s will evaluate the potential scope of reputational and financial risk arising from these events,” the ratings agency said in a statement. “While the full impact of these increased risks will only unfold over a period of years, we will also assess the degree of near- and medium-term risks to determine whether to downgrade the current Aa1 rating.

“We will monitor possible emerging risks emanating from potential lawsuits/settlements, weaker student demand, declines in philanthropic support, changes in state relationship and significant management or governance changes,” according to Moody’s.

In addition to a potential Moody’s downgrade, the school will take a hit from their sponsors and on future revenue.

Penn State football brings in the fifth highest revenue ($72.7 million) and second highest profit for a college program ($53.2 million) while Penn State athletics adds $24.1 million–mostly from merchandise sales and sponsorships including NIKE, Inc. (NYSE:NKE) and PepsiCo, Inc. (NYSE:PEP).

On Friday, the Wall Street Journal reported that “about a half-dozen” advertisers pulled ads for the upcoming Penn State games on ESPN (NYSE:DIS). An unidentified media buyer said he advised clients to move away from the games in the short-term.

Many of the advertisers haven’t been identified, but on Thursday did withdraw its ESPN sponsorship for the Penn State and University of Nebraska game due to the allegations against Penn State, according to the Journal article.

Penn State has a long road ahead of them and many have wondered if the bottom has even dropped out yet.

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