Two bond ratings experts with Standard & Poor’s Global said the significant disagreements between OU and its Cross Village partners are “unprecedented” and likely to lead to legal proceedings.
Cross Village was created through a public-private partnership between the university and nonprofit corporation Provident Oklahoma Education Resources Group, Inc., as well as a property manager. Provident Oklahoma leases the land from OU, and OU in turn leases residential space from Provident Oklahoma.
Cross opened in fall 2018 and saw low occupancy — and was marketed as a luxury housing option for upperclassmen, and the price of living at Cross matches or exceeds many other Norman luxury housing options. After OU did not renew the parking and commercial leases in June, Cross Village dining has not been available for residents, and the complex continues to see low occupancy.
Letters warning of legal action were exchanged in September between attorneys representing Cross Village bond trustee UMB Bank and the university. The trustee letter said the university's failure to renew Cross Village commercial and parking leases violated a moral obligation and could harm the university’s future financial standing, while the university’s letter called the trustee letter "patently false, misleading, and disparaging."
Jessica Wood, S&P Global higher education sector leader, works on both university ratings and privatized student housing ratings for the organization.
Wood said S&P Global has seen public-private partnerships for student housing for the past 15 to 20 years, and usage of partnerships in student housing has increased in the past five to 10 years. Wood said the volume of public-private partnerships may have increased because in some cases, private sector entities can build housing faster or more efficiently.
Mary Ellen Wriedt, the primary S&P Global analyst who works on the organization’s OU rating, added that public-private partnerships at different universities should be considered carefully and individually because universities have different demand characteristics and different relationships with their private partners.
Wood and Wriedt both said a disagreement like the one reflected in the letter exchange between OU and the bondholder are unprecedented in the public-private partnerships they’ve rated in higher education.
“It's quite unprecedented,” Wood said. “I think it's pretty rare. I think in this instance, one thing that stands out as a little bit of a differential is that there were several senior management changes over the course of, leading up to this project, and over the life of the project. And it does seem like that that has played into some of the decisions made.”
Wood said in the public-private partnership sector for student housing in higher education, the term moral obligation does not have a specific legal definition — though in some other sectors, such as in state and local government, moral obligation bonds can be issued that have a specific legal definition.
Since Cross Village is student housing created through a public-private partnership, Wood said any potential moral obligation for OU would not have a specific legal definition.
“It's very different state-by-state, institution-by-institution,” Wood said. “But in this case, the university entered into a lease, but in this space when the words moral obligation are used, it is really very much an implied moral obligation. It is not a legal moral obligation. And the university has the legal ability to make that choice, that option on renewing the lease or not.”
According to an Oct. 7 report from Municipal Market Analytics — an independent research firm that provides strategic market and credit analysis and commentary on current, historical and quantitative conditions of the U.S. municipal sector, according to its website — OU’s decision to terminate its Cross Village parking and commercial leases is almost like not paying a moral obligation or an appropriation-style debt.
“Despite the lack of a legal obligation for OU to renew the lease and make the requisite payments,” the MMA report said, “the institution was heavily involved in the transaction and knew that continuation of its leases was critical for debt service payments, particularly in the early years after capitalized interest ran out.”
In the original letter sent from a representative of Cross Village in September, the representative maintained that "major mutual funds, which aim to judiciously invest ordinary peoples' valued savings and pension monies, lent $250 million based on trusting the promise of the university that it would honor its obligations," meaning that investors believed OU would renew the leases, though it did not have legal obligation to do so.
Wriedt said it would not surprise her if the matter enters legal proceedings.
“I mean, certainly, it would be my understanding that this is probably going to go to legal proceedings,” Wriedt said, “perhaps between (the university and another party or parties involved), but we have been advised by the university that they were within their legal right not to renew or continue with the lease, that it was an annual obligation.”
In S&P Global’s most recent ratings, the university’s rating was unaffected by the disagreement and retained its A+ long-term debt credit rating because S&P Global did not factor Cross Village into OU’s ratios because the university is not financially responsible for Cross Village.
The 2017A and 2017B bonds issued for Cross Village receives a separate S&P Global rating from the university rating. S&P Global downgraded its ratings on those bonds Aug. 9 from BB to CC. According to the report, the downgrade was due to insufficient project revenues to fund debt service and the draw on the debt service reserve fund for the debt service payment that was made Aug. 1.
S&P Global’s ratings are as follows, in decreasing order: AAA, AA, A, BBB, BB, B, CCC, CC, C, D. According to the ratings organization’s website, a CC rating indicates that the obligor being rated is “highly vulnerable; default has not yet occurred, but is expected to be a virtual certainty.”
Bobbi Gajwani, S&P Global’s primary analyst rating on the Cross Village bonds, said the rating reflects that S&P Global expects Provident Oklahoma to default on the debt service payments.
“The rating particularly reflects our expectation of default on the bonds, (our expectation) that they won’t pay the next debt service payment, which is due in February,” Gajwani said.
Gajwani said ratings of BBB- and above are considered investment grade, and any rating below BBB- is considered a riskier investment. The likelihood of repayment is lower.
Gajwani said the first Cross Village bond rating was BBB-, and it has since been downgraded to BB with a negative outlook and again to CC with a negative outlook. A negative outlook indicates S&P Global’s expectation that the rating could further decrease.
Gajwani said the language in the ground lease specifies that pursuant to a separate default on the ground lease payments, the university could take ownership of the Cross Village facility. But such a default is unlikely, Gajwani said, due to the $20 million upfront payment the university received — a payment which likely paid off the ground lease obligation.