Moody’s maintains negative outlook for California Western’s bonds

Moody’s Investors Service reaffirmed a negative outlook for California Western School of Law’s bonds due to the institution’s continuing “challenges in stabilizing operating performance.”

Moody’s wrote Monday that it was also affirming the bond rating that affects $9.2 million worth of the San Diego-based school’s debt. Last January, the service had downgraded the “Series 1998” bonds from Baa1 to Baa3 due to worse than projected operating deficits.

The school has expanded into new student markets, Moody’s wrote this week, but has had “very weak operating performance” along with a modest amount of debt.

“Continued enrollment growth and moderation of tuition discounts offer some prospects for gradual improvement in financial performance, although the school projects that operating deficits will continue until fiscal 2019,” Moody’s said.

Niels B. Schaumann, California Western’s dean, said Wednesday he thought the school was a good candidate for a stable outlook.

“Our enrollment numbers are up and our financial situation is better than the projections indicated it would be,” he said. “I think things are moving in the right direction.”

The school’s first-year enrollment rose from 248 students in 2015 to 273 last year, an increase of about 10 percent. California Western’s 2017 enrollment slightly decreased to 263 students, according to information the school submitted to the American Bar Association.

Schaumann said the bonds in question were issued to pay for construction of the school’s library. The school has enough money in a dedicated account to pay off the bonds immediately, he said, but has decided not to do so. “We are doing better on our investments than what the bonds are costing us,” Schaumann said.

Moody’s said stronger student demand evidenced by increased net tuition revenue could help lead to a bond upgrade.

“It appears whether they can climb out of this negative outlook will depend on their ability to increase enrollment or get people to pay more,” said Kyle McEntee, executive director of the advocacy group Law School Transparency.

The challenge California Western and other schools in a similar position face, he said, is finding ways to boost enrollment while not experiencing a significant decline in the credentials of incoming students. The reported increase in LSAT takers, as well as the 12 percent uptick in the number of law school applicants nationwide compared to a year ago, could help California Western strike the necessary balance, McEntee said.