Moody’s Ratings, a credit agency that rates a business or other entity’s credit risk, downgraded USC’s credit rating to Aa2 from its past Aa1 on April 1. One of the reasons cited for the downgrade was USC’s medical operations exposure to industry-wide rising costs.
This downgrade will impact USC by making it more expensive for the institution to borrow money, which it does annually, to fuel operations or expansions.
Moody’s cited USC’s healthcare operations, which comprise over 40% of its 2023 operating revenue, as one of USC’s biggest credit challenges due to exposure to “challenging operating environments” such as wage growth in the medical field. That threatens USC’s overall performance, Moody’s also said.
“USC’s public bonds are very highly rated and have been for many years,“ USC said in a statement to Annenberg Media. Moody’s changed USC’s credit rating on March 28 to Aa2/stable, which remains high investment grade. Our ratings continue to be viewed positively by our external bondholders, and we continue to maintain excellent access to the capital markets.”
This downgrade comes as USC expands its healthcare system, with its new Arcadia Hospital and Discovery and Translational Hub at the Health Science Campus.
USC faces additional challenges that led to Moody’s downgrading of USC’s credit rating.
The rating agency cited USC’s “rising leverage,” or debt. It also cited USC’s “multi-year period of highly public legal issues,” which it said could potentially damage the institution’s reputation if continued in the future.
USC faced several legal challenges in recent years. The college admissions scandal sparked national headlines, including those regarding unethical efforts by “Full House” actress Lori Loughlin and fashion designer Mossimo Giannulli to get their daughter, YouTuber Olivia Jade Giannulli, admitted. Another example is the charges against former USC doctor George Tyndall for sexual abuse of students.
Moody’s report outlines factors that could lead to an upgrade in the rating, including a growth in USC’s total wealth, in part buttressed by its “exceptional fundraising success” that Moody’s said has averaged over $500 million over the last three years. The rating agency also cited USC’s “large research activity” that it said led to current sponsored awards that it valued at over $1.1 billion.
Examples of sponsored awards that have increased the school’s wealth include a recent $4 million federal grant to the Keck School of Medicine to support researchers aiming to protect children against air pollution, a $4.5 million grant to a USC Information Sciences Institute research in quantum computing, and more than $7 million in government grants to support USC Stem Cell research on kidney disease and Lou Gehrig’s disease.
Beyond that, the downgrade report also cited potential improvement in the school’s profile due to possible “sustained strengthening of healthcare operations and university-wide operating performance.”
Located near the heart of downtown Los Angeles, USC has an “excellent strategic position” for a research university, according to Moody’s report.
Moody’s report also outlines the diverse revenue sources received by USC. The institution received 30% of its revenue from student charges, 41% from patient care, 11% from grants and contracts, 5% from gifts and the rest from investment income and miscellaneous sources.
USC could face further downgrades, Moody’s noted, if the university struggles to increase its profits while its savings and investments fail to grow, thus straining its “leverage profile.” This would threaten its financial stability. Additionally, taking on significantly more debt could be problematic, especially if the university doesn’t see an increase in cash reserves. Lastly, a further hit to USC’s reputation could reduce donations and student applications.
“USC also continues to proactively invest in long-term strategic initiatives. As a result, we are experiencing greater exposure to the healthcare industry and a growing operating expense base and debt portfolio. One of USC’s many priorities is to help transform the future of health. It is our goal to keep more people well across all facets of life. To fulfill that goal, we remain focused on our mission to enhance healthcare education, patient care and research. The intentional investments being made today are expected to benefit USC over time, both financially and reputationally,” said USC.