DALLAS -- Moody's Investors Service has downgraded the revenue bond rating for Odessa Junior College to Baa from A after the Texas school lost millions of dollars in risky derivatives investments and almost doubled its debt to pay expenses.

"This revision stems from concerns regarding significant cash-flow deficiencies experienced by the district as a result of improper investments of essentially all of the district's cash balances, including operating funds and debt service reserve funds, in volatile long-term securities," Moody's said when it announced the rating change late Friday.

The revision followed a similar action within the past several weeks by Standard & Poor's Corp, which also gave its lowest investment grade rating to the $13.8 million in consolidated fund revenue bonds issued in 1985, 1989, and 1992. Standard & Poor's downgraded the bonds to BBB-minus from A-plus and placed the debt on CreditWatch, primarily because inappropriate investments exhausted the institution's financial cushion and ongoing risks, the rating agency said.

Beginning last fall and continuing through February, Odessa invested in about $22 million in derivative products including 30-year collateralized mortgage obligations and inverse floaters.

When interest rates went up, the value of the investments fell to about one-third. Subsequently, the college's cash reserves and fund balances were depleted, precipitating a significant financial crisis this spring.

Not only did it suffer trading losses, but the 5,000-student college was stuck with a large protfolio of relatively illiquid investments that it cannot afford to sell, most likely for many years, industry sources said. To cope, the college has increased the property tax rate 8% and increased tuition by 16%, or $4 per credit hour, Moody's said. A 10% reduction in expenditures is expected from early retirement programs, hiring freezes, elimination of several athletic programs, a reduction of travel expenses, and other items.

Meantime, Odessa has been paying operating expenses and meeting debt service requirements by using proceeds from more than $12 million in installment delivery revenue bonds. About $6 million were placed with Western National Bank in May and about $6.2 million with Bank One in August.

"The installment delivery revenue bonds are structured to mature over the next nine years," Moody's said. "As a result, the district's annual debt service requirements will nearly double, significantly reducing operating flexibility."

Moody's said the maintenance of the college's investment grade rating on the consolidated revenue bonds is contingent on implementation of an investment policy with appropriate checks and balances, including external professional review and periodic reporting.

The college's financial adviser and top officials could not immediately be reached for comment yesterday. About a month ago, the Odessa Junior College Board adopted a policy banning such investments in derivatives and approved the sale of $6.2 million in bonds to pay tax anticipation notes that were due in early August and provide operating funds for the college.

At the time, officials said they believed the plan to curtail expenses and raise cash by selling debt would be sufficient to keep the college open and to continue academic programs.

"What we are attempting to do is avoid a forced sale of securities into a depressed market," said Ray Hutchison, a principal at Hutchison Boyle Brooks & Fisher, a Dallas bond law firm that was retained to advise Odessa. "The only way to do that is provide alternative financing, and then if interest rates turn around and values come back, they can make decisions on sound economic considerations."

Mel Schonhorst, an executive at First Southwest Co. in Dallas and financial adviser to the college, told the board in August that the sale of the bonds as well as other measures in a cash-flow plan were designed so the school didn't need to rely on income from its investments.

"They can hold out indefinitely," Schonhorst said in early August. "It's important that they not rely on the securities."

Schonhorst said that the securities, including collateralized mortgage obligations backed primarily by Federa National Mortgage Association, and inverse floaters, were purchased between about November and February through various firms.

The investments were made by Roger Coomer, the school's fiscal officer, who resigned this summer when the financial crisis escalated and many in the investment industry criticized the school's investments.

Odessa officials have said that they were not aware of how much was invested in derivative products or the risk of the investments. The district could owe $1.9 million in reported liabilities to brokerage firms in connection with repurchase agreements. The district is contesting the payments, and no resolution has been made.

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