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Law School Gets Bond Downgrade

Moody’s Investors Service, an investment assessment services company, downgraded Vermont Law School’s $10.3 million in 2011 revenue bonds this week. Moody’s lowered its rating for the school’s bonds from Baa2 to Ba1 this week.

The downgrade drops Vermont Law School by two rating categories.

TD Bank holds the bonds, which were issued by the Vermont Educational and Health Buildings Finance Agency.

Moody’s gave the school a negative outlook because a covenant written into the debt service contract requires that the school maintain a rating of Baa2 or higher. TD Bank could demand an accelerated repayment of the debt, according to Emily Schwarz and Edith Behr, the Moody’s analysts who authored the report.

The downgrade is based on “substantial declines” in law school enrollments because of reduced national demand for juris doctorate programs and an expectation that revenues from student tuition will be lower at Vermont Law School. This loss of revenue, Moody’s said, will put pressure on the school’s cash flow and debt service coverage.

In a statement, Peter Glenshaw, a spokesman for the Vermont Law School, tied the downgrade to national trends in the legal field. There has been a decline in the number of students taking the LSAT entrance exam and declining enrollments in law schools across the country, he said.

Glenshaw says Vermont Law School has taken steps to stabilize its finances.

“We expect to finish this year with a surplus, and our fiscal health remains stable,” Glenshaw wrote. “As Moody’s noted, we have carefully managed this situation. We have increased enrollment in our distance learning program and have announced numerous partnerships with other colleges and universities. In addition, this year we have announced $2 million in new gifts to the law school and $700,000 in grants. We will continue to carefully steward our fiscal resources as we consider the future of Vermont Law School.”

Vermont Law School is developing partnerships with Wilson College, the University of Vermont, Boston University, Green Mountain College, Central State University in Wilberforce, Ohio, Morehouse College and Spelman College in Atlanta, Johnson State College and Community College of Vermont.

Moody’s says Vermont Law School’s declining enrollment and small size are a particular challenge because the school is a standalone institution.

Vermont Law School relies heavily on tuition as a source of revenue and has faced a decline in applicants to the juris doctorate program. Enrollments at the Vermont Law School declined 3.5 percent in 2013 for all programs and a 45 percent drop in the number of new applicants in the J.D. program from the fall of 2009 to the fall of 2013, according to Moody’s.

“Net tuition per student has stagnated or declined for four years, and is projected to decline further in FY 2014 and FY 2015,” according to the rating agency report.

Moody’s took into account two important factors that add to the institution’s risk: the Vermont Law School’s small size ($28.2 million revenue in fiscal year 2013) and unlike most law schools around the country, the Vermont Law School is a standalone institution with no backing from a larger university or college.

The rating agency said the Vermont Law School’s strengths include: a low debt burden (about one-half of yearly operating revenue), no plans to incur more debt and management efforts to cut expenses. The school has stabilized cash flow, it said.

“Fiscal diligence will be critical in the future as revenues continue to decline,” Moody’s analysts reported.

The law school can improve its bond rating by “stabilizing” enrollments and net tuition revenue growth.