Aa2 RATINGS AFFIRMED ON EXISTING DEBT; UNIVERSITY HAS A TOTAL OF $704 MILLION PRO FORMA RATED DEBT OUTSTANDING
Board of Trustees of the University ofAlabama
General Revenue Bonds (Taxable Recovery Zone Economic Development Bonds, Series 2010-B
Expected Sale Date
Public University Revenue
General Revenue Bonds (Federally Taxable - Build America Bonds - Direct Payment to Issuer), Series 2010-C
Expected Sale Date
Public University Revenue
General Revenue Bonds (Taxable Bonds), Series 2010-D
Expected Sale Date
Public University Revenue
NEW YORK, Oct 27, 2010 -- Moody's Investors Service has assigned Aa2 ratings to the University
of Alabama's $149 million of General Revenue Bonds, Series 2010-B, Series 2010-C
and Series 2010-D. The rating outlook is stable. At this time Moody's has also
affirmed the Aa2 ratings on the University's General Revenue Bonds detailed
below in RATED DEBT. The Series 2010-B Bonds will be designated as
"Recovery Zone Bonds" and the University expects to receive a cash
subsidy from the United States Treasury equal to 45% of the interest payable on
the Series 2010-B Bonds. The Series 2010-C Bonds will be designated as
"Build America Bonds" and the University expects to receive a cash
subsidy from the United States Treasury equal to 35% of the interest payable on
the Series 2010-B Bonds. The Board expects to receive a 35% or 45% interest
payment subsidy from the federal government related to the Build America and
Recovery Zone bonds but will budget for debt service assuming no subsidy
payment. The subsidy payments will be not be pledged to bondholders.
USE OF PROCEEDS: Proceeds from the Series 2010-B, 2010-C and 2010-D Bonds will
be used for various capital projects including infrastructure improvements and
to pay costs of issuance. Based on use of bonded proceeds the larger projects
include North Bluff Residential Community ($66 million), Greek Housing ($22
million), student recreation center ($15 million), and improvements to Russell
Hall and Moore Hall ($18 million).
LEGAL SECURITY: Secured interest in Pledged Revenues which consist of a broad
basket of general fees and revenues, excluding primarily state appropriations
and restricted gifts. There is a board covenant to maintain 200% coverage of
Maximum Annual Debt Service. Pledged Revenues in FY 2009 totaled $512 million,
which represented 30% growth over the prior year and approximately 10.3 times of
Pro-forma Maximum Annual Debt Service, without giving any credit for the
expected subsidies from the U.S. Treasury.
INTEREST RATE DERIVATIVES: None.
*Markedly growing enrollment with 28,172 full-time equivalent students in fall
2009 (up 40% from 2005). Improving student qualifications at vibrant flagship
university for the Aa1-rated State of Alabama which provided 23% of operating
revenues in FY 2009. Management reports further increases in enrollment
demand in fall 2010 from the prior year, with 54% freshmen selectivity and 52%
yield on admitted students. The University's market strength has translated into
large increases in net tuition revenue, which more than doubled between FY 2005
and 2009 to $225 million, aided by non-residents students who pay 2.6 times the
resident tuition rate and made up 43% of the fall 2010 incoming class.
*Uncommonly strong cash flow generation from operations. Operating performance
as calculated by Moody's, with three-year average operating margin of 5.8%
through FY 2009, supports healthy pro forma maximum annual debt service coverage
of 2.1 times
*Solid financial resource cushion with expendable financial resources of $542
million at the end of FY 2009. Expendable financial resources cushion pro forma
debt 0.66 times and operations by 0.85 times. Monthly Liquidity at September 30,
2009 of $331 million translates to 202 days cash on hand.
*Good fundraising strength as the University recently concluded a $613 million
comprehensive campaign and continues to maintain momentum in donor support.
*Expected enrollment growth and enhanced standards for upgraded
student facilities will continue to drive future borrowing with pro forma
debt expected at 1.2 times FY 2009 revenues. The University has received limited
state capital support and has pro forma debt per student of $30,744, well above
our median for Aa2-rated public colleges and universities of $13,439.
Future projects to be partially funded with debt will likely include
student housing facilities.
*Volatile state funding environment with FY 2011 expected appropriations at just
71% of FY 2008 funding, although stimulus funds help increase the total to 78%
of the earlier year.
*Plans to increase sponsored research activity at the University, which lags
that of peers, likely to face stiff competition. Research expenditures of $37.8
million in FY 2009 remain fairly limited for a flagship university.
MARKET/COMPETITIVE POSITION: GROWING ENROLLMENT AND IMPROVING MARKET POSITION
REFLECT VIBRANT REGIONAL DEMOGRAPHIC TRENDS; RELATIVELY MODEST SPONSORED
RESEARCH ENTERPRISE FOR FLAGSHIP UNIVERSITY
Moody's expects that the University's growing enrollment and
improving reputation as Alabama's oldest public university will provide a
solid foundation for a thriving institution in the near future. Located in
Tuscaloosa, the University is the flagship campus of a system that also includes
the University of Alabama - Birmingham (rated Aa2) and the University of Alabama
in Huntsville (rated Aa3). Professional programs include the School of Law and
the College of Community Health Sciences, which partners with The University of
Alabama School of Medicine.
The University plans to continue its recent pattern of enrollment growth, with
fall 2010 full-time equivalent enrollment of 28,172 up 40% from 20,100 FTE in
2005. Demographic projections for the number of high school graduates shows only
slight growth for Alabama over the next decade, but the University draws an
increasing portion of students from the broader region, with 43% of
incoming freshmen coming from outside of Alabama in fall 2010. With
recruiters in Texas, Georgia, Tennessee, the Carolinas, Virginia and Florida as
well as other states, the University is benefiting from capacity constraints at
the flagship universities in those states and meeting a demand for a flagship
experience from non-resident students who pay higher tuition rates.
Undergraduate selectivity has improved from 85% in 2002 to 54% in 2010, with
yearly increases in the number of freshman applications. Yield on admitted
students has made some improvement over the recent past and came in at 52% for
the fall of 2010. Management reports further improvements in the academic
preparedness for the entering classes. Approximately 85% of students are
undergraduates and pay a rate of tuition that is slightly below the average of
peer universities in the South and Southeast. For the 2010-2011 academic
year, the University implemented a 13% increase in tuition to offset a reduction
in state operating support. In-state tuition is $7,900 in 2010-11, while
non-resident students will be charged $20,500. Overall, net tuition revenue grew
a remarkable 25% in FY 2009 to $8,886 over the prior year and more than doubled
between FY 2005 and 2009.
In part because it lacks a medical school, the scope of sponsored research
activities at the University has lagged that of many of its flagship peers. As
measured by research expenditures, the University had $37.8 million of research
activity in FY 2009. Although it is unlikely that the University will
dramatically change its research profile in the near term, management's
strategic commitment to increase research activity will help to further
diversify revenues and serve as a source of growth for the future. Sponsored
programs benefit from considerable funding source diversity, with
federal agencies well diversified among the National Science
Foundation, Department of Education, Department of Health and Human Services and
Department of Energy.
OPERATING PERFORMANCE: STRONG ANNUAL OPERATING PERFORMANCE SUPPORTS SOLID DEBT
Moody's believes that the University's consistently positive
operating performance reflects a culture of sound financial management and
favorable pricing power. The University's operating margin has averaged
5.8% over the last three years as calculated by Moody's. This strong performance
supported average debt service coverage of 3.6 times. We note that the
University has a fiscal year end of September 30, which provides slightly more
deferred revenue at its fiscal year end than other public universities with June
30 end dates. The pro forma spending rate tends to slightly overstate operating
performance as compared to peers given a relatively higher cash position from
fall tuition payments on hand. State appropriations in 2009 accounted for 23% of
the University's revenues, while student charges (including auxiliary revenue)
contributed 48%, grants and contracts 10% and gifts 7%.
The near-term outlook for state appropriations remains pressured after a marked
increase between 2005 and 2008, with a 22% decrease in FY 2009. The FY 2011
expected appropriations are just 71% of FY 2008 funding, although stimulus funds
help increase the total to 78% of the earlier year. The University plans to
offset the state funding losses through enrollment growth, tuition increases and
Moody's Aa1 general obligation rating of Alabama reflects a state that has
strong financial management practices and a low debt burden, compensating for
relatively weak economic characteristics. For more information on our general
obligation rating of the State of Alabama please see the latest report dated May
BALANCE SHEET PROFILE: HEALTHY RESOURCE LEVELS AIDED BY FUNDRAISING WHILE
ENROLLMENT GROWTH PROMPTS INCREASED DEBT
Moody's believes the University's sizeable pool of total financial resources of
$845 million at the end of FY 2009 reflects a healthy cushion relative to pro
forma debt and operations. Expendable financial resources of $542 million cover
pro-forma debt 0.66 times and operating expenses by 0.85 times. On a per
student basis, pro forma debt is relatively high at $30,744 and was at just
$16,041 at FYE 2005. The elevated level reflects, in part, the limited amount of
capital support the University receives from the state compared to other
highly-rated universities. Because the majority of new debt funded projects have
healthy revenue generating potential, the impact of the increased leverage on
the University's credit profile is somewhat mitigated. In addition, given the
potential for resource growth and strong operating performance, we believe the
University is well positioned to absorb the additional debt. The University has
no firm plans for future borrowing at this time, but will likely issue
additional debt in the coming years if its enrollment growth patterns continue.
The University maintains healthy liquidity. Monthly liquidity of $331 million at
FYE 2009 translates to 202 days cash on hand. The university also has a
conservative debt structure characterized by all fixed rate debt with relatively
Fundraising is expected to continue playing a key role in further boosting the
University's balance sheet in the near future. On June 30, 2009, the University
closed its comprehensive "Our Students, Our Future" comprehensive
campaign goal, having raised $613 million on a $500 million goal. Approximately
half of the funds raised are for scholarship funds which should support the
University's revenue generating potential over the long term. Management
reports continued momentum in donor support with over $70 million of cash gifts
in FY 2010.
As a unit of the University of Alabama System, the University participates in
the pooled endowment fund managed at the System level. In the 12-month period
ending September 30, 2010, the well diversified pool had a 7.1% return. The
endowment pool asset allocation at August 31, 2010 was 45% global equity, 23%
fixed income, 14% hedge funds, 9% real estate, 6% private equity, and 3%
cash. The hedge fund exposure deploys three funds-of-funds with broad diversity
through over 100 underlying managers. The Intermediate fund which holds the
University's midrange working capital had a 5.3% return for the same period.
The stable outlook is based on continued strengthening of the student market
position and sound University operating performance as well as resource growth
keeping pace or outpacing increases in debt.
What Could Change the Rating UP
Material growth in financial resource base outpacing additional debt; further
improvements in scope of research activities and student market position.
What Could Change the Rating DOWN
Marked decline in operating cash flow; significant reductions in financial
KEY INDICATORS (Fiscal year 2009 financial data and Fall 2010 enrollment data)
FTE enrollment: 28,172 students
Freshman selectivity: 54%
Freshman yield: 52%
Total financial resources: $845 million
Total pro forma debt: $704 million
Expendable financial resources to pro forma debt: 0.66 times
Expendable financial resources to operations: 0.85 times
Monthly Liquidity: $331 million
Monthly Days Cash (unrestricted funds available within 1 month divided by
operating expenses excluding depreciation, divided by 365 days): 202 days
Pro forma direct debt-per-student: $30,744
State appropriation per student: $6,195
Average operating margin: 5.8%
State general obligation rating: Aa1 (stable outlook)
Operating reliance on state support: 23%
General Revenue Series 1997 and 2004A: Aa2, insured by National Public Finance
General Revenue Series 2001: Aa2
General Revenue Series 2006A and 2006B: Aa3, insured by Syncora
General Revenue Series 2008A, 2009-A, 2009-B, 2010-A, 2010-B, 2010-C, and
University: Dr. Lynda Gilbert, Vice President for Financial Affairs and
Underwriter: Larry Ward, Morgan Keegan & Company, 205-802-4225
The last rating action with respect to The University of Alabama was on July 8,
2010, when the Aa2 rating with a stable outlook was affirmed.
The principal methodology used in rating University of Alabama, AL was Moody's
Rating Approach for Private Colleges and Universities rating methodology
published in September 2002. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found on Moody's
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 Analytics' 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.
Dennis M. Gephardt
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Aa2 RATING TO THE UNIVERSITY OF ALABAMA'S $149 MILLION GENERAL REVENUE BONDS SERIES 2010-B, 2010-C AND 2010-D; OUTLOOK IS STABLE
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