A national uptick in law school applicants wasn't enough to prompt a key bond credit rating agency to reverse its negative outlook on New York Law School's finances.

Moody's Investors Service on Thursday affirmed the school's Baa3 bond rating, which is the lowest rating for investment grade bonds and indicates that Moody's believes the school's bonds represent a moderate risk to investors. The Moody's report assigned the law school a negative outlook, saying that the school's spending of its financial reserves to cover operating shortfalls is “well above” the industry standard of 5 percent. The school's bonds are valued at about $140 million.

“The rating also considers tuition pricing challenges and operating deficits that will continue for the foreseeable future, leading to a likely deterioration of spendable cash and investments,” reads the Moody's report. “Despite an increase in the number of applications for law schools nationally, net tuition revenue remains pressured, resulting in a weak average operating deficit of 26 percent over the last three years.”

Law school spokeswoman Elizabeth Thomas said in a written statement Friday that the Moody's rating reflects the schools “strong leadership team, focus on strategic planning, and recent successes amid a challenging environment for legal education.”

“The rating also recognizes the high value of the school's Tribeca campus and its large endowment,” she wrote.

Amid the bad news, Moody's also found some bright spots at New York Law School. The school owns prime real estate in New York's trendy Tribeca neighborhood—three buildings that were appraised at $253 million in 2015. A profit-sharing deal tied to the sale of condominiums on land that the law school once owned helped the law school improve its fiscal picture in 2018, Moody's noted. Moreover, strategic planning that reduced operating expenses and increased enrollment helped to reduce operating deficits. Still, covering the school's operating expenses will “require extraordinary endowment spending,” Moody's found.

The school enrolled the equivalent of 960 full-time students in 2018, and generated $48 million in revenue last year, according to Moody's.

The school took out bonds to fund the construction of its main building, which opened in 2009 and cost $190 million.

New York Law School's financial picture would improve with a growth in net tuition revenue and strategic initiatives that bring its operating expenses into equilibrium, Moody's noted. But if the school has to dip too far into its reserves or the market value of its real estate declines, then its bond rating could be downgraded, the report warns.