Grand Canyon University bond refunding gets lowest investment grade rating

Phoenix-based Grand Canyon University, which is wrestling with legal and regulatory matters, is refinancing up to $520 million of taxable bonds rated a notch above junk by Fitch Ratings.

The refunding involves debt maturing in October from a $1.2 billion taxable revenue bond issue the private Christian university sold in 2021 to refinance the remaining balance of notes it issued in 2018 to fund the purchase of the university’s assets from publicly traded Grand Canyon Education. 

Grand Canyon University

Those bonds fetched a junk rating of Ba1 from Moody’s Ratings, which revised the outlook to negative from stable in January, citing financial pressures, as well as plans to remarket near-term bond maturities.

In June, Fitch released a BBB-minus rating and stable outlook for the outstanding bonds and the upcoming refinancing, saying it was based on GCU’s “competitive strengths in both the traditional and online higher education markets, and an operating model that provides strong cash flows and high flexibility.”

“These credit strengths are tempered by very high leverage with additional risks from its debt structure,” the rating agency said in a report that listed various regulatory and legal actions involving GCU. 

The university is in the process of refinancing the debt via a private placement, school spokesman Bob Romantic said this week. 

The series 2024 bonds and sinking funds will refinance bonds from the 2021 issue that mature on Oct. 1, according to Fitch. 

GCU, which was a nonprofit from its creation in 1949 until 2004, when it was sold to private investors, regained its 501(c)(3) status from the Internal Revenue Service in 2018 after its purchase from Grand Canyon Education. 

It sued the U.S. Department of Education, which had declined to acknowledge the school’s nonprofit status for purposes of federal student financial aid, and is appealing last year’s $37.73 million fine from the federal agency for misleading students about the cost of its doctoral programs.

“We do not expect a hearing on our appeal until January at the earliest but are confident in our case,” Romantic said in an email. “Our doctoral disclosures are not only common among institutions in higher education with dissertation-based doctoral programs, but our disclosures go beyond what other universities provide or what is legally required.”

GCU is also a defendant in a Federal Trade Commission lawsuit over “deceptive advertising and illegal telemarketing.” Fitch said the school is a target of private litigation and is undergoing an IRS audit for fiscal years 2015-19.

“The likely outcomes of these suits, appeals, and regulatory matters cannot be assessed at this time,” Fitch said, adding while GCU has not placed any funds in reserve related to any suits or fines, it has the capacity to manage currently proposed fines.

GCU has contended it is the victim of “coordinated and targeted” federal government actions. The school had enrollment of about 25,000 at its Phoenix campus last fall and has approximately 93,000 students enrolled for its online and hybrid programs, according to Fitch.