Oakes Hall, Vermont Law School
Oakes Hall, Vermont Law School (Jared C. Benedict via Wikimedia Commons)

Correction: This article has been changed to reflect that Albany Law School is the only stand-alone law school to which Standard & Poor’s assigned a stable credit outlook.

Moody’s Investors Service has downgraded Vermont Law School’s credit rating amid falling enrollment and financial uncertainty.

Moody’s last week reduced the rating from Ba1 to Baa2—a decline of two tiers that moved the school from the “adequate” credit-quality category to “speculative.” Vermont Law’s $10.3 million in bonds from 2011 now carry a negative outlook, according to Moody’s.

The downgrade “reflects continued substantial declines in J.D. enrollment given reduced national demand, expectations for lower net tuition revenue that will pressure cash flow and debt service coverage, and modest projected headroom on a financial covenant that may require an extraordinary release of net assets to remain compliant in the near term,” Moody’s said.

Vermont Law said it had braced for the report.

“We anticipated the downgrade given the uncertainty in the national legal education market and the continued decline in the number of prospective law school students taking the LSAT entrance exam,” spokesman Peter Glenshaw said in a written statement. “We expect to finish this year with a surplus, and our fiscal health remains stable.”

Vermont was the latest stand-alone law school to take a hit from a credit-rating service; in December, Standard & Poor’s concluded that they are especially vulnerable.

“Credit quality has been deteriorating for stand-alone law schools, which are more susceptible to credit deterioration than law schools that are nested within comprehensive universities,” the service said. “But even with programmatic diversification, some lower rated (‘BBB’ category) universities that have historically relied on their law school operations for profitability are experiencing credit deterioration.”

Of the five stand-alone law schools Standard & Poor’s looked at—Albany Law School, Brooklyn Law School, New York Law School, Thomas M. Cooley Law School and Thomas Jefferson School of Law—it deemed only Albany’s credit outlook stable.

Moreover, in November Moody’s affirmed the Baa1 rating on Southwestern Law School’s $28.6 million in outstanding bonds, but revised its outlook from “stable” to “negative” amid “softening student demand.” The Los Angeles school saw applications fall by 33 percent during the past two years and its financial resources had been stagnant for five years, Moody’s found.

Moody’s downgraded New York Law School’s underlying credit rating from A3—in the “good” credit quality category—to Baa1, or “adequate,” in August. The new rating affected $131.9 million in bonds that helped pay for a new building that opened in 2009. Again, lower enrollment was a factor in the downgrade.

Moody’s affirmed Brooklyn Law School’s Baa1 rating in August, giving it a stable outlook. Moody’s said the school has a positive balance sheet of $123 million and “solidly positive operating cash flow.” Still, the school’s operating revenue during fiscal year 2012 was down by 8 percent compared to 2009.

Vermont Law School enrolled 129 new J.D. students this fall, down by 25 percent from 171 the previous year, according to the American Bar Association. Moody’s placed the enrollment decline at 45 percent since 2009.

“[The law school’s] very small operating size ($28.2 million in revenue for FY 2013), combined with high dependence on tuition revenue, makes the school vulnerable to even a small decline in enrollment,” Moody’s said.

Still, the service concluded that the school has done a good job of cutting expenses; carries a fairly low debt burden; and is developing new masters programs that could boost nontraditional enrollment.

“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,” Glenshaw said. “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.”

Contact Karen Sloan at ksloan@alm.com. For more of The National Law Journal’s law school coverage, visit: http://www.facebook.com/NLJLawSchools.