Grand Canyon University gets negative rating outlook from Moody’s

The outlook on Phoenix-based Grand Canyon University’s junk bond rating was revised on Monday to negative from stable by Moody’s Investors Service amid the school’s ongoing clash with federal regulators. 

Moody’s said while its Ba1 rating incorporates GCU’s “substantial scale, enrollment growth trend, and adequate operating performance,” several factors led to the outlook change.

“The revision of the outlook to negative reflects weakened unrestricted liquidity, increased financial leverage through bank loans secured by restricted cash and investments, prospects for thinner operating performance in a higher interest rate environment given plans for remarketing of near-term maturities, and rising regulatory risks,” the rating agency said in a statement.

The university, which had $1.3 billion of debt outstanding as of June 30, pushed back against Moody’s move, contending its finances are in good shape.

“As GCU has disclosed publicly, its enrollment is strong, GCU online is now back to historically strong growth rates, ground enrollment is outperforming almost all other universities and GCU’s hybrid enrollment is also growing,” the university said in a statement. ”It’s unfortunate that Moody’s changed the outlook to negative given all of these positive trends.”

The Christian university, which was a nonprofit from its creation in 1949 until 2004, when it was sold to private investors, regained its 501(c)(3) status in 2018. 

GCU sued the U.S. Department of Education in 2021 after the agency declined to acknowledge the school’s nonprofit status for purposes of federal student financial aid.

Moody’s said regulatory risk weighs on the university’s credit quality and noted, “further heightened regulatory scrutiny or unfavorable resolution of litigation” could lead to a rating downgrade. An upgrade could result from factors including a favorable resolution of the lawsuit and ongoing enrollment and revenue growth, it added.

The school has said its nonprofit status is recognized by the Internal Revenue Service, state of Arizona, and National Collegiate Athletic Association and that its litigation against the U.S. government’s education regulator over student aid has led to retaliation from other federal agencies.

In the latest skirmish, the U.S. Education Department fined GCU $37.73 million in October for misleading students about the cost of its doctoral programs.

The university in November announced it will appeal “the unprecedented and unjust” fine with GCU President Brian Mueller declaring the school “does not mislead or deceive students in any way.”

GCU sold $1.2 billion of taxable revenue bonds in 2021 to refinance the remaining balance of notes issued in 2018 to fund the purchase of the university’s assets from publicly traded Grand Canyon Education (NASDAQ:LOPE).

In 2022 and 2023, the university entered into credit agreements with banks. 

GCU had operating revenue of $1.4 billion in fiscal 2023 and its fall 2023 on-campus and online enrollment totaled about 107,000, according to Moody’s.