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Rating Update:

MOODY'S AFFIRMS ST. JOHN'S UNIVERSITY'S (NY) A3 RATING; OUTLOOK IS STABLE

12 Apr 2011

UNIVERSITY HAS $509.6 MILLION OF RATED DEBT OUTSTANDING

Dormitory Authority of the State of New York
Higher Education
NY

Opinion

NEW YORK, Apr 12, 2011 -- Moody's Investors Service has affirmed St. John's University's ("St. John's" or the "University") A3 rating to its Series 1998, 2001A, 2005A, 2007A, 2007C, 2008A, 2008B-1 and 2008B-2 revenue bonds issued through the Dormitory Authority of the State of New York. The rating outlook is stable.

SUMMARY RATING RATIONALE:

The A3 rating is based on St. John's University's solid, but competitive market position as a large private Catholic university located in Queens, New York that has a track record of favorable operating performance, strong fundraising, sufficient liquidity and modest balance sheet that Moody's believes should show some strengthening from investment returns, operating surpluses, and gift flow. These credit strengths are somewhat offset by relatively high leverage and the University's competitive environment.

STRENGTHS

*Large, urban, Catholic university with strengthening student market position as demonstrated by improved selectivity rates (45.5% in fall 2010 compared to 59.2% in 2006).

*Consistently balanced to positive operating performance due to sound budgeting practices with three-year average margin of 1.1% supporting debt service coverage of 1.7 times based on fiscal 2010 data.

*Solid history of fundraising (average three-year gift revenue of $21.6 million for fiscal year (FY) 2008 - 2010).

*No additional borrowing plans in the near-term.

CHALLENGES

*Highly leveraged balance sheet and operating profile provide thin cushion of pro-forma direct debt and debt service especially after recent recession. Expendable financial resources cover $542.5 million of pro-forma debt by 0.3 times.

*Heavy reliance on student charges (net tuition, fee, and auxiliary revenue streams represented 84.5% of operating revenue in FY 2010) creates vulnerability to competition and pressure on net tuition growth.

*Significant erosion of financial resources due to investment losses in the recent recession combined with significant capital investments over the last several years. Unrestricted and expendable financial resources declined by approximately 50% to $118.8 million and $134 million in FY 2010 respectively from a peak of $234.2 million and $260.4 million in FY 2007.

*Increasing competition with lower-cost public universities and more selective private universities, many of which have larger endowments to support financial aid, will continue to require significant growth in financial resources and ongoing marketing efforts.

DETAILED CREDIT DISCUSSION:

LEGAL SECURITY: All bonds are a general obligation of the University with a security interest in Pledged Revenues consisting of an aggregate amount of tuition and fees equal to maximum annual debt service on outstanding bonds. A mortgage pledge provides additional bondholder security. There is no debt service reserve fund.

INTEREST RATE DERIVATIVES: The University entered an interest rate swap agreement with Morgan Stanley Capital Markets, Inc. to synthetically fix a portion of the interest rate payments on the Series 2008 bonds. The swap was originally entered into to provide an interest rate hedge on the Series 2005C auction rate bonds. The swap agreement is on a $57.4 million notional amount and extends the term of the original underlying bond, through July 2026. St. John's has the option to terminate the swap agreement early. Under the agreement both the University and counterparty are obligated to post collateral at the threshold level of $10 million. The mark-to-market value of the swap as of March 7, 2011 is positive $10,660.

MARKET POSITION/COMPETITIVE STRATEGY: Moody's believes that St. John's, a large, urban, private Catholic university in Queens, New York serving a largely undergraduate student population (74% of students are undergraduate), will maintain a stable student market position. The university offers a diverse array of undergraduate, graduate and professional programs, including law, business, and pharmacy studies from its main campus in Queens, and satellite campuses in Manhattan, Staten Island, Oakdale, Rome, Italy, and Paris, France. Enrollment has grown steadily at an average 3% per year from fall 2008 through fall 2010 and reached 18,084 full-time equivalent (FTE) students in fall 2010. Management plans to continue to grow enrollment modestly through increases in transfer students and graduate distance learning programs. The University reports that it currently enrolls 133 FTEs in its six online undergraduate programs.

Over the last several years, St. John's has shifted its focus from a largely commuter population, to that of a residential school, adding substantial housing to a current total of 3,500 beds on the Queens campus. The University has expanded its recruitment efforts and has experienced increases in application receipts from states with growing populations such as California, Texas and Florida. It has also focused recruitment on states with high Catholic populations such as Illinois. St. John's market position has continued to strengthen over the last five years, with applications increasing significantly to 54,871 in fall 2010 from 25,594 in fall 2006. The dramatic increase in application volume has allowed St. John's to improve its freshman selectivity to 45.5% in fall 2010, down from 59.2% in fall 2006. However, the expansion into new recruitment areas has brought with it a decrease in yield with a matriculation rate decline to 12.5% in fall 2010 from 21.5% in fall 2006. To counter this trend, the University reports that it has increased its marketing efforts through high school visits and recruiting events.

St. John's competes intensely with other private catholic universities and local public universities in New York and New Jersey. The University maintains its Vincentian Mission to serve the economically disadvantaged by enrolling at least 35% of pell grant eligible students every year.

OPERATING PERFORMANCE: Moody's expects St. John's to continue to generate favorable operating performance based upon good net tuition revenue growth, (accounts for 84.5% of Moody's calculated operating revenue) conservative budgeting and financial practices, including careful expense containment, budgeting for full debt service amortization (both principal and interest), annual capital requirements for deferred maintenance and contingency funds, and declining to take distributions from its endowment, though the school maintains a policy of a 5% endowment spend rate. The University's three-year average operating margin from FY 2008-2010, as calculated by Moody's, was 1.1% with consistently strong cash flow margins (14.4% as of FYE 2010), which resulted in three-year average debt service coverage of 1.7 times over the same time period. Management is projecting improved operating surplus in FY 2011 compared to FY 2010, due to a recent voluntary separation offer that the University reports will yield $17 million in annual payroll savings.

BALANCE SHEET POSITION: St. John's balance sheet has weakened meaningfully since FY 2007 due to investment losses and significant investment in capital assets, leaving them with a more leveraged balance sheet from a debt and operating perspective relative to its A3-rated peers. Expendable financial resources provide thinner coverage of debt and operations at 0.3 times and 0.3 times, respectively, compared to 0.5 times and 0.7 times, respectively, in FY 2007. Moody's expects that the university will be able to improve its financial resources in the near-term through improved investment returns, operating surpluses and gift flow. The University's fundraising is strong for its rating level with gift revenues averaging $21.6 million annually from FY 2008-2010 compared to the median of $19.4 million for A-rated private institutions with at least 3,000 FTE students. St. John's completed its last major capital campaign in FY 2006, raising $272 million ($250 million goal).

St. John's has sufficient liquidity with $189.6 million of monthly liquidity providing 175 days or almost six months of funds available within one month to support operations. The university also has thin but adequate monthly liquidity to demand debt at 100%.

Over the last several years, the university has invested heavily in the campus, with capital investment representing an average of almost 17% of operations from FY 2007- 2010. Recent projects include completion of three housing projects totaling 950 beds on the Queens campus and a 130,000-square-foot University Center/Academic Center.

In FY 2011, St. John's entered into a lease purchasing agreement through the Dormitory Authority of the State of New York's ("DASNY") Tax-Exempt Leasing Program ("TELP"). The University plans to lease $25 million of equipment over the next two to three years to complete an energy sustainability project. Management reports that the energy savings yielded from the project will exceed debt service on the capital leases and related equipment operating costs by an estimated $47 million over the useful life of the equipment Capital leases are considered direct debt by Moody's and add to the University's already leveraged balance sheet and operations.

St. John's has no additional plans to issue new debt in the next two to three years. Moody's believes that St. John's has very limited additional debt capacity at the rating level without substantial growth in financial resources.

RECENT DEVELOPMENTS/ RESULTS

As of February 28, 2011, St. John's reported a 16.3% year-to-date investment return on its endowment. Current asset allocation includes: 40.6% domestic equities; 19.4% international equities; 23.9% hedge funds; 8.6% private equities; and 7.5% fixed income. Oversight of the approximately $301 million endowment is provided by an Investment Committee of the Board of Trustees and internal University staff. Moody's notes some manager concentration with 10.1% invested in the Westwood fund.

The University has $189.9 million of variable-rate debt with a tender feature compared to nearly $118.8 million of unrestricted financial resources. The University renewed its letters of credit (LOC) supporting the Series 2008A (JP Morgan Chase), Series 2008B-1 and 2008B-2 (Bank of America) January 2011 and the expiration dates extend to September 24, 2014, mitigating near-term bank renewal risk. We believe this debt structure does carry additional risks to the University, as under certain circumstances the letter of credit banks could accelerate the bonds and terminate the letters of credit, even if the bonds have not been tendered. These circumstances include a significant delay in reporting of financial statements, failure to maintain an unrestricted cash and investment to debt ratio of 0.35 times and a rating covenant at Baa2. Management reports that for FY 2010, the University's cash to debt ratio was 0.41 times.

Outlook

The stable outlook recognizes the University's strengthened market position, balanced operating performance and prudent fiscal management, somewhat offset by higher leverage.

What Could Make the Rating Go UP

Significant improvement in balance sheet position combined with continued strong cash flow margins and solid student demand

What Could Make the Rating Go DOWN

Increased debt without commensurate growth in financial resources, weakening student tuition growth, large downturn in operating performance or liquidity levels, breach of a covenant contained in the letter of credit reimbursement agreement

KEY INDICATORS (FY 2010 financial data and fall 2010 enrollment data)

Total Full-Time Equivalent Students (FTE): 18,084 students

Freshman Acceptance Rate: 45.5%

Freshman Matriculation Rate: 12.5%

Total Direct Debt: $518.5 million ($509.6 million Moody's rated)

Expendable Resources to Direct Debt: 0.3 times

Expendable Resources to Operations: 0.3 times

Three-year Average Operating Margin: 1.1%

Operating Cash Flow Margin: 14.4%

Monthly Liquidity: $189.6 million

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 175 days

Monthly Liquidity to Demand Debt: 100%

Reliance on Student Charges: 84.5%

RATED DEBT

Series 1998, 2001A, 2005A, 2007A and 2007C: A3 underlying; MBIA insured

Series 2008A: A3 underlying; supported by a letter of credit from J.P. Morgan Chase Bank, N.A. (rated Aaa/P-1); expiration date: September 24, 2014

Series 2008B-1 and 2008B-2: A3 underlying; supported by a letter of credit from Bank of America, N.A. (rated Aaa/P-1); expiration date: September 24, 2014

CONTACTS

University: Jacqueline Travisano, Vice President for Business Affairs & Chief Financial Officer, 718-990-8328 or Anthony Macaluso, Controller, 718-990-2452

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was Moody's Rating Approach for Private Colleges and Universities published in September 2002.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Eva Bogaty
Analyst
Public Finance Group
Moody's Investors Service

Stephanie Woeppel
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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MOODY'S AFFIRMS ST. JOHN'S UNIVERSITY'S (NY) A3 RATING; OUTLOOK IS STABLE
No Related Data.
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