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MOODY'S ASSIGNS A1 RATING TO THE UNIVERSITY OF NORTHERN IOWA'S DORMITORY REVENUE BONDS, SERIES U.N.I. 2010A AND DORMITORY REVENUE REFUNDING BONDS, SERIES U.N.I. 2010B; OUTLOOK IS STABLE

08 Dec 2010

UNIVERSITY WILL HAVE A TOTAL OF $132 MILLION OF RATED DEBT OUTSTANDING

Board of Regents, State of Iowa
Higher Education
IA

Moody's Rating

ISSUE

RATING

Dormitory Revenue Refunding Bonds, Series U.N.I 2010B

A1

  Sale Amount

$10,160,000

  Expected Sale Date

12/09/10

  Rating Description

Public Higher University Revenue

 

Dormitory Revenue Bonds, Series U.N.I 2010A

A1

  Sale Amount

$16,790,000

  Expected Sale Date

12/09/10

  Rating Description

Public Higher Education Revenue

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Dec 8, 2010 -- Moody's Investors Service has assigned an A1 rating to the University of Northern Iowa's (UNI's) Dormitory Revenue Bonds, Series U.N.I. 2010A and Dormitory Revenue Refunding Bonds, Series U.N.I. 2010B, issued by the Board of Regents, State of Iowa. At the same time, we have affirmed the ratings of the outstanding debt of the University (see RATED DEBT). The rating outlook is stable.

RATINGS RATIONALE: The University of Northern Iowa's A1 rating reflects its market niche of undergraduate education and as an Iowa public university, adequate financial resources and favorable operating performance and good debt service coverage levels.

USE OF PROCEEDS: Proceeds of the Series 2010A Bonds will be used to pay project costs of the first phase of a student housing facility, fund a debt service reserve fund and pay the costs of issuance. Proceeds of the Series 2010B Bonds will be used to advance refund certain maturities of the outstanding Series 2000 Dormitory Revenue Bonds, partially fund a debt service reserve fund and pay the costs of issuance.

LEGAL SECURITY: The bonds are secured by a pledge of the net revenues of the University's Dormitory System. The bonds are on parity with $16 million of outstanding Dormitory Revenue Bonds. There is a Debt Service Reserve Fund.

INTEREST RATE DERIVATIVES: None

STRENGTHS

*Established market niche as one of three Iowa four-year public higher education institutions, as well as the only one with an emphasis on undergraduate education; moderate annual enrollment growth with total enrollment for Fall 2010 of 11,681 full-time equivalent (FTE) students, up from 10,835 in Fall 2006.

*Adequate financial resource coverage of debt, with Fiscal Year (FY) 2010 expendable financial resources covering proforma debt 1.0 times and operations 0.5 times.

*Overall positive operating performance, with FY 2010 three-year average operating margin of 3.5% and good cash flow reflected in a 14.5% operating cash flow margin and acceptable average debt service coverage of 2.2 times for FY 2008-2010.

*Pledged revenues provide good debt service coverage in FY 2010 on outstanding bonds: Academic Building Revenue Bonds - 10.1 times coverage; Dormitory Residence Bonds - 3.4 times; Student Union Revenue Bonds - 4.4 times; Student Health Center Revenue Bonds - 9.7 times; Field House Revenue Bonds - 6.4 times.

CHALLENGES

*Expected enrollment challenges from weak state demographic environment and projected decline in high school graduates coupled with strong competition from higher education institutions within and outside Iowa.

*Continuation of healthy debt service coverage of auxiliary systems, particularly residence halls in light of expected enrollment challenge and competitive student market.

MARKET POSITION/COMPETITIVE STRATEGY: SOUND STUDENT DEMAND FROM ESTABLISHED MARKET NICHE AS FOR IOWA PUBLIC UNIVERSITY ALTHOUGH FUTURE ENROLLMENT CHALLENGES POSSIBLE FROM COMPETITION AND DECLINING STATE HIGH SCHOOL GRADUATES

We believe that University of Northern Iowa will continue to have sound student demand from its important educational role within the State due to its undergraduate emphasis as one of the three universities governed by the Iowa Board of Regents, along with State University of Iowa (rated Aa1) and Iowa State University (rated Aa2). Despite its niche, we believe UNI will face enrollment challenges due to weak state demographics and competition from the other Iowa public universities as well as nearby community colleges. Current projections are for a 6% decline in high school graduates within the State of Iowa to 2018.

For Fall 2010, UNI reported enrollment of 11,681 FTEs, up from 10,835 in Fall 2006. Management is looking to increase headcount enrollment for each of the next ten years. Since Fall 2007, UNI experienced a decline in freshman applications that may be attributable to current economic conditions, as well as the implementation of new admission standards by the Board of Regents for the three Iowa public universities. Nonetheless, UNI experienced a steady improvement in its percentage of accepted freshman who enrolled from 49.5% in Fall 2006 up to 58.0% for Fall 2010.

OPERATING PERFORMANCE: FAVORABLE OPERATING PERFORMANCE AND CASH FLOW PROVIDING GOOD DEBT SERVICE COVERAGE

We expect the University's operating performance to remain at least balanced to modestly positive, providing favorable cash flow to support debt service. For FY 2010, based on preliminary audit results, UNI produced a three-year average operating margin of 3.5% for fiscal years 2008-2010, driven by strong performance in FY 2010 from lower operating expenses from measures implemented by UNI to address expected state funding reductions. Operating cash flow margin was good at 14.5% for FY 2010 and debt service coverage is good, with average annual debt service coverage of 2.2 times. We expect the University to continue to produce sound debt service coverage based on active fiscal oversight.

UNI received a net state appropriation of $95.8 million in FY 2009, then in FY 2010 saw a $15.4 million reduction to $80.4 million. In the current year, FY 2011, the University received $79.0 million, a decrease of $16.7 million or 17.5 percent from FY 2009. For FY 2010 UNI received $12.4 million in ARRA stimulus funds but will receive no federal ARRA funds for FY 2011. The University implemented nearly $18 million of expense initiatives to bridge the revenue gap, including division cuts and an early retirement program. The efforts drove the improvement in operating performance for FY 2010 and should keep FY 2011 performance at least balanced. We expect the University to continue to produce favorable operating performance driven by tuition and auxiliary fee increases, coupled with continued expense management.

Moody's currently maintains an Aaa issuer rating for the State of Iowa, with a stable outlook. The rating is based on the State's debt levels that are amongst the lowest in the nation and limits growth in fixed costs; it also has a well-funded pension plan. The State has maintained funded budget reserves equal to about 7% of FY 2010 revenues. The State also maintains two primary reserve funds, its Cash Reserve Fund and the Economic Emergency Fund. The rating also acknowledges an economy that is slowing but with job losses lagging the national average. Iowa's below-average population growth (5.4% from 1990 to 2000 versus 13.1% for the nation) also limits its economy. For more information, see Moody's report dated June 16, 2010.

BALANCE SHEET POSITION: ADEQUATE FINANCIAL RESOURCE BASE CUSHIONING DEBT AND OPERATIONS

We expect UNI will continue to have adequate financial resources to cushion both debt and operations. For FY 2010, UNI had $134 million of expendable financial resources, up from $113 million the prior year. Expendable resources cushion $134 million of proforma debt by 1.0 times and annual operating expenses by 0.5 times. University of Northern Iowa reported good liquidity for FY 2010 (at 6/30/2010), with $100 million of unrestricted funds available within one month or 153 days cash on hand (see definition in Key Data section).

The Board anticipates issuing dormitory bonds for additional apartment housing on behalf of the university in the next year.

The University entered the national phase of a fundraising campaign, with a $150 million total goal, with $75 million targeted for scholarships and $75 million for programs. To date the University raised $110 million, with $55 million in deferred gifts and $55 million in cash and pledges. Gift revenues have been generally steady, with three-year average gift revenues of $9.5 million in FY 2008-2010. Not included is a $11 million cash gift received after fiscal year end for a Literacy Center.

SECURITY PLEDGE: PLEDGED REVENUES PROVIDE ADEQUATE SECURITY UNDER VARIOUS REVENUE SECURITIES

Moody's approach to rating the University's various series of bonds includes analyzing both the sufficiency of legally pledged revenues as well as the essentiality of the financed projects to the University. The University is expected to continue to produce sound debt service coverage from pledged revenues on its outstanding bonds.

*Academic Building Revenue Bonds are secured by gross student fees and charges, as well as institutional income as defined in the documents to the extent that student fees and charges are insufficient to meet annual debt service. There is a debt service reserve fund. FY 2010 coverage was 10.1 times. There is a cash-funded debt service reserve fund.

*Dormitory Revenue Bonds are payable solely from the net rents and revenues derived from the operations of the University's student residence halls and dining and incidental facilities. There is a debt service reserve fund. The Board has covenanted to maintain 1.35 times coverage. FY 2010 coverage was 3.4 times.

*Student Health Facility Bonds are secured by revenues provided from a mandatory student fee and net revenues of the Student Health Clinic. The Board has covenanted to a 1.2 times debt service coverage. FY 2010 coverage was 9.7 times. There is a cash-funded service reserve fund.

*Field House Revenue Bonds are secured by revenues generated from student fees, including a mandatory student fee, and the net revenues of the Field House Enterprise. The Board has covenanted to a 1.2 times debt service coverage. FY 2010 coverage was 6.4 times. There is a cash-funded debt service reserve fund.

*Student Union Bonds are secured by revenues from a mandatory student fee and the net revenues of the Student Union system. FY 2010 coverage was 4.4 times compared to a 1.2 times covenant coverage. There is a cash-funded debt service reserve fund.

Outlook

The stable rating outlook reflects our expectation of continued favorable debt service coverage based on maintenance of stable enrollment and prudent expense management resulting in positive cash flow generation.

What could change the rating--UP

Sustained increased enrollment, coupled with strengthened operations and cash flow generation, significantly improved reserves, and limited additional borrowing

What could change the rating--DOWN

Deterioration of operating performance and cash flow, resulting in declining debt service coverage; decreased enrollment and lack of resource growth

KEY INDICATORS (Preliminary FY 2010 financial results; Fall 2010 enrollment data)

Total Enrollment: 11,681 full-time equivalent students

Total Proforma Debt: $134 million

Expendable Resources to Proforma Debt: 1.0 times

Expendable Resources to Operations: 0.5 times

Monthly Liquidity: $100 million

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 153 days

Three Year Average Annual Operating Margin: 3.5%

Share of Revenues from State Appropriations: 36.3%

State of Iowa Issuer Rating: Aaa, stable outlook

RATED DEBT

Academic Building Revenue Bonds, Series 1994, 1996, 2002, 2003, 2003A, 2005, 2008, 2009: rated A1

Academic Building Revenue Bonds, Series 2007: rated A1 (insured by Syncora Guarantee)

Dormitory Revenue Bonds, Series 1999, 2000, 2002, 2003, 2010A: rated A1

Dormitory Revenue Refunding Bonds, Series 2010, 2010B: rated A1

Field House Revenue Bonds, Series 2001, 2004, 2005: rated A1

Student Health Revenue Bonds, Series 2004: rated A1

Student Union Revenue Bonds, Series 2002: rated A1

CONTACTS

University: Gary Shontz, Controller and Treasurer, 319-273-2000

Financial Advisor: Springsted Incorporated, Barry Fick, 651-223-3042

METHODOLOGY

The principal methodology used in this rating was Public College and Universities published in November 2006.

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

Diane F. Viacava
Analyst
Public Finance Group
Moody's Investors Service

Leah Ploussiou-Chatzigiannis
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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New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO THE UNIVERSITY OF NORTHERN IOWA'S DORMITORY REVENUE BONDS, SERIES U.N.I. 2010A AND DORMITORY REVENUE REFUNDING BONDS, SERIES U.N.I. 2010B; OUTLOOK IS STABLE
No Related Data.
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