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Penn State’s Rating May Be Cut After Sanctions for Sex Abuse

July 24 (Bloomberg) -- Pennsylvania State University faces a credit-rating downgrade from Moody’s Investors Service following sanctions resulting from the child-sex-abuse case involving former assistant football coach Jerry Sandusky.

Moody’s is reviewing the university’s “management and governance,” which it said in a press release today appear weak based on recent reports and investigations. The company said it will also monitor student applications and fundraising, which it said remained strong.

Penn State has about $1 billion of bonds, which are rated Aa1 by New York-based Moody’s, the second-highest grade. The review will be concluded in 90 days, the company said.

The university has already been penalized by bondholders, according to John Donaldson, director of fixed income at Radnor, Pennsylvania-based Haverford Trust Co., which oversees about $700 million of municipal securities. Investors in the past week have been asking to be paid an additional 5 basis points, or 0.05 percentage point, to buy the tax-exempt debt, he said.

The school’s crisis will overshadow the debt “until the entire financial impact is able to be quantified, and we’re not there yet,” said Donaldson. Haverford Trust is an investor in Penn State bonds, he said.

Rogue Coach

Penn State this week was sanctioned by the National Collegiate Athletic Association and fined $60 million for its failure to prevent the sexual abuse by the former football coach, who was convicted last month and faces sentencing.

Former FBI Director Louis Freeh this month issued a report saying university officials tried to conceal the abuse to protect the school from bad publicity.

The report detailed the administration’s failure to prevent Sandusky’s crimes as well as recommendations for improving oversight, said John Nelson, a managing director of public finance at Moody’s. For instance, the board of trustees could be better informed about all operations, including athletics, he said.

“Governance and management is a key element in our review,” said Nelson. “We want to review whether or not the quality of management is consistent with the rating.”

Sandusky, 68, was convicted last month on 45 criminal charges tied to abuse of 10 boys over 15 years and may spend the rest of his life in prison.

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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