Penn State Faces Credit Downgrade, Lost Sponsors From Sandusky Scandal

That $60 million is just one shoe. The other shoe has yet to drop.

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on July 25 2012 4:56 AM

The hits kept coming for Penn State on Tuesday when Moody's Investors Service warned of a possible downgrade and State Farm, an official sponsor of the football program, announced it was pulling out.

Moody's, which rates Penn State bonds with an Aa1 credit rating, put it on notice Tuesday of a possible downgrade. An Aa1 credit rating is an investment-grade rating. Moody's is expected to complete its investigation of Penn State, which has about $1 billion in debt, within the next 90 days.

The review will assess the potential credit implications of these reports and investigations, which collectively point directly to weaknesses in the university's management and governance practices, Moody's said in a statement.

That announcement was made just hours after State Farm told Penn State it would no longer run television or radio advertisements during Penn State home football games.

As a result of all the activity that's happening, we decided to pull the sponsorship to continue to show our support for the victims, State Farm spokeswoman Arlene Lester told StateCollege.com. We have decided to cancel our football sponsorship for the coming season, but will remain sponsors for all the other [Penn State] teams we support. 

State Farm's quick decision to end its relationship with Penn State football was somewhat surprising to one marketing expert.

I think every one of Penn State's sponsors will make whatever decision they believe is the right one for their business, said Ed Horne, chief operating officer for Madison Ave Sports and Entertainment. I wouldn't have expected much of those decisions would have been made already, but some might have been waiting to see what their sanctions were before making their decision.

The NCAA heavily penalized Penn State on Monday for high-level coverups of former assistant coach Jerry Sandusky, who was convicted of 45 charges of child abuse. The school was fined $60 million, banned from post-season play for the next four seasons, penalized on scholarships for the next four seasons and had its record from 1998 to 2011 wiped away. The school will also lose an estimated $13 million in Big 10 bowl revenue, which will be donated to charity.

The sanctions are intended to severely hamper Penn State's ability to compete at a high-level for the foreseeable future. The school could potentially lose multiple players, according to Rivals.com national analyst Mike Farrell, which could make it difficult for it to compete in the competitive Big Ten conference.

The sanctions change everything, Farrell told Rivals.com's Steve Megargee. The sanctions are the one thing I said way back when could splinter this class and could ruin future classes. That's what kids care about. The scandal itself hurt recruiting last year, but it wasn't going to stop kids from going to Penn State. Sanctions will do that.

But the impact may hit Penn State even harder in its wallet than it does on the field.

The unprecedented $60 million fine will hurt the school's athletic department -- Forbes estimated it made a net income of $31.6 million in 2010-11 --  but the bigger damages could be in loss of sponsorships, donations, ticket sales, and more. Horne, who helped guide the NHL throughout two lockouts during his 15-year tenure with the league, suspects the overall brand damage will be much larger than the fine from the NCAA.

Horne believes the school can help mitigate any potential losses by being as transparent as possible -- something Penn State badly failed to do while handling the child abuse allegations against Sandusky.

I think the university and athletic department need to be open, honest, have humility, he said. They also need to work really hard to put a great compelling product on the field that people would want to respond to.

Joe Favorito, a marketing expert and Columbia University lecturer, believes that winning on the field will also help - We all love comebacks and heroes -- but that the Penn State brand isn't as badly damaged as some might believe.

It's no longer the gold standard that it was before Sandusky, but the school still has a lot that could be attractive to both pre-existing and potential new sponsors.

I still think it's a strong brand, said Favorito, who has worked with the New York Knicks, among other sports organizations, in the past. They are still in the Big 10, will still draw a huge amount of attention, and still be on television every week. I don't see a lot of sponsors suddenly running away.

Although it is damaged, (Penn State) is still a brand that everyone understands.

One of the key questions for Penn State going forward will be whether it can maintain its current level of donations. The university received $208 million in donations in the most recent fiscal year, the second-highest total in school history, despite the scandal of the Sandusky allegations and the firing of longtime coach Joe Paterno. The Nittany Lion Club, a booster club supporting the school's athletic department, also had a strong year by raising more than $82 million.

Penn State spokesman David La Torre wouldn't speculate on how donations will be affected, but there is some precedent for athletic departments maintaining their numbers in spite of scandals.

Alabama, which faced a two-year postseason ban in the early 2000s, didn't see a decline in athletic department revenue, according to ESPN. Penn State is facing more serious charges than Alabama, but could maintain much of its donor base if it proceeds smartly. It has one of the largest alumni associations in the world and is known for routinely filling its 106,500-seat Beaver Stadium.

How Penn State handles its next steps from a donor perspective will be critical, Jeff Schemmel, former athletic director at San Diego State, told ESPN. There's clearly strong support for Penn State athletics and Penn State football, and many of those people will remain on board. I think 50 percent would be a conservative number.

Those donations could ensure that other school programs, including other athletic programs, are not cut due to the football team suffering a loss in revenue.

The school will try to pay off its fines through its athletic reserve fund and capital maintenance budget, according to La Torre.

Those funds could be put to the test in the coming years. Penn State, with a $1.8 billion endowment, faces millions in civil lawsuit payments and a ratings downgrade in the aftermath of the Sandusky scandal. Moody's, which gives Penn State an Aa1 credit rating, put the school on notice Tuesday of a possible downgrade.

The rating service is expected to complete its investigation of Penn State, specifically looking at how it handled the Sandusky scandal, within the next 90 days.

The review will assess the potential credit implications of these reports and investigations, which collectively point directly to weaknesses in the university's management and governance practices, Moody's said in a statement.

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