Sandusky Scandal Leads Moody’s to Cut Penn State’s Credit Rating

Pennsylvania State University had its credit rating cut one level by Moody’s Investors Service because of the “substantial financial impact” of the Jerry Sandusky child sex-abuse scandal.

The downgrade, to Aa2, the third-highest rating, affects $893 million of debt. On Oct. 15, Standard & Poor’s revised its credit outlook on Penn State to negative. S&P also gives the university its third-highest rating.

A former Penn State assistant football coach, Sandusky, 68, was sentenced to 30 to 60 years in prison Oct. 10 for sexually abusing children over a 15-year period. Prosecutors said he was a serial child molester who used a charity he set up called Second Mile to recruit victims, then plied them with money and trips to the school’s football games.

The resulting upheaval led to the firings of Penn State President Graham Spanier and Coach Joe Paterno, who led the school’s football program for 46 years. Paterno died in January.

While the university has taken action toward settling with the victims quickly, the number of claims and the final cost may be significant, Moody’s analysts led by Diane Viacava said in a statement. Active state and federal investigations hold the potential for more charges, they said.

The rating has a stable outlook because the victims’ claims should be manageable at that lower ranking, Moody’s said.

“We expect that Penn State will remain a leading U.S. public university with favorable student demand, positive operating performance, high donor support and a strong research position,” the analysts wrote.

Moody’s said moves to overturn a culture dependent on a few senior managers with inadequate board oversight are under way, “but it could take time for the strong internally focused culture of Penn State to fully implement and embrace the recommendations of best practices.”

A Penn State bond maturing in 2040 traded yesterday to yield 3 percent, compared with 3.2 percent on July 24, according to data compiled by Bloomberg.

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