UNIVERSITY WILL HAVE $1.6 BILLION OF OUTSTANDING DEBT INCLUDING THE CURRENT OFFERING
Arizona Board of Regents
Higher Education
AZ
Moody's Rating
ISSUE | RATING |
|---|
Tax-Exempt Series 2010D System Revenue Bonds | Aa3 |
Sale Amount | $39,780,000 |
|---|
Expected Sale Date | 12/21/10 |
|---|
Rating Description | Public University Revenue Bonds |
|---|
|
Taxable Series 2010C System Revenue Bonds (Build America Bonds) | Aa3 |
Sale Amount | $11,525,000 |
|---|
Expected Sale Date | 12/21/10 |
|---|
Rating Description | Public University Revenue Bonds |
|---|
|
Moody's Outlook Stable
Opinion
NEW YORK, Dec 8, 2010 -- Moody's has assigned an Aa3 rating to Arizona State University's (ASU) combined
$51.305 million of fixed-rate Series 2010C Taxable System Revenue Bonds (Build
America Bonds) and Tax-Exempt Series 2010D System Revenue Bonds. The Series
2010C bonds are expected to be issued as taxable Build America Bonds, and ASU
expects to receive cash subsidy Direct Payments from the U.S. Treasury, equal to
thirty-five percent (35%) of the corresponding interest payable on the Build
America Bonds. Direct Payments are not pledged as security for payment of the
Build America Bonds. We have also affirmed the ratings on the University's
outstanding rated debt (see Rated Debt section below). The outlook is stable.
RATING RATIONALE: The Aa3 rating reflects ASU's role as a large and growing
public university with a healthy student market and research profile. Key credit
challenges include high debt levels, thin balance sheet resources relative to
ASU's size, and ongoing pressure on state funding.
USE OF PROCEEDS: Various capital projects including renovation and expansion of
student health services facility on Tempe campus, acquisition of an office
building in Tempe for University offices (space currently leased), various
infrastructure investment projects as well as funds to pay the costs of the bond
issuance.
LEGAL SECURITY OF SYSTEM REVENUE BONDS:
The University's System Revenue Bonds are payable from and secured by a pledge
of and first lien on Gross Revenues, which include tuition, fees, and other
Facilities Revenues, including auxiliary enterprises and indirect cost recovery.
In FY 2010, Gross Revenues totaled $782.7 million compared to $69.8 million
of pro-forma maximum annual debt service on System Revenue Bonds (senior and
subordinate lien). The University also has $10.2 million of Series 2006 Arizona
State University Research Park Inc. Development Refunding Bonds and $33.82
million of SPEED Revenue Bonds (issued in August 2010) which have subordinate
liens on Gross Revenues. The System Revenue Bonds carry a rate
covenant requiring the University to set fees so that Gross Revenues provide
at least 1.5 times coverage of maximum annual debt service on System Revenue
Bonds.
INTEREST RATE DERIVATIVES: ASU as well as the Arizona Capital Facilities Finance
Corporation (ACFFC) and the ASU Foundation, both component units of the
University, have entered into interest rate swaps to hedge the interest rates on
certain of their outstanding variable rate bonds. These swaps include: 1) a
floating-to-fixed rate, SIFMA-based swap on a $103 million notional amount
(associated with the Series 2008A and B refunding bonds), 2) a floating-to-fixed
rate, percent of LIBOR swap and a constant maturity swap on a $51 million
notional amount (associated with the Series 2008 Sun Devil Energy LLC Bonds),
and 3) a floating-to-fixed rate, SIFMA-based swap on $22.4 million
notional amount and a floating-to-fixed rate, percent of LIBOR swap on a $12.1
million notional amount (associated with the Brickyard LLC variable-rate demand
bonds). The market valuation of the University's swap was negative $11.1
million as of June 30, 2010. The combined market valuation of the component
units swaps was negative $8.4 million as of June 30, 2010.
STRENGTHS
*Large, comprehensive, urban university benefiting from robust demographic
projections for a growing number of high school graduates over the next decade
and strong out-of-state student demand. In fall 2010, ASU enrolled 69,459
full-time equivalent (FTE) students (over 70,000 headcount), a 3.7% increase
over fall 2009. Management projects significant enrollment growth across its
four campuses in the future, particularly at the Downtown Phoenix and
Polytechnic campuses. ASU has a national draw, with approximately one-third of
entering freshmen in fall 2010 recruited from outside of the state.
*Healthy growth of net tuition per student ($8,090 in FY 2010, a 12% increase
over FY 2009) and a fairly diversified operating revenue base (approximately 45%
student charges, 29% state appropriations, 17% grants and contracts and 9% other
revenue streams, including private gifts and investment income). ASU's continued
ability to grow student generated revenue will be an important credit factor as
state support declines. For fall 2010, the University implemented a nearly 20%
tuition increase for new in-state undergraduates and 11% increase for in-state
graduates, but a more moderate 5% out-of-state tuition increase.
*The pledge of System Revenues to System Revenue Bondholders is broad and
provides strong coverage of outstanding debt service responsibilities. In FY
2010, System Revenues totaled $782.7 million. Management is focused on expense
containment and revenue growth in order to compensate for state funding cuts.
Operating performance improved in FY 2010, with a 6% operating surplus generated
(including full state appropriation although three months of state
appropriations were deferred until FY 2011 as described below).
CHALLENGES
*Thin levels of balance sheet resources given large base of operating expenses
and high debt levels, and pressure on liquidity with postponement of April, May,
and June 2010 state operating appropriations until October 1, 2010, per enacted
legislation. Including the Foundation and other component units, ASU had nearly
$831 million of total financial resources in FY 2010, which would
cushion pro-forma debt 0.5 times and $1.4 billion of expenses 0.6 times.
*Ongoing economic challenges of the State (Aa3 issuer rating with a stable
outlook), with resulting cuts in state funding and deferred cash payments from
the State to public universities. ASU experienced a 13.8% cut in state funding
in FY 2009 and another 4% cut in FY 2010.. During FY 2009 and 2010, the
State delayed certain monthly General Fund appropriations to the public
universities. FY 2011 appropriations are essentially flat with FY 2010, and
approximately $7.5 million of monthly state appropriations is being
deferred until October 2011 (FY 2012). Pay-as-you go capital support from the
State has historically been extremely limited.
*Pressure on fundraising with contribution revenue across the component units,
including the ASU Foundation, down significantly in FY 2009 and 2010 ($33.5
million in FY 2009 and $50.4 million compared to over $100 million of
contribution revenue annually in FY 2006-2008). The Phoenix economy has been hit
hard during the recession contributing to pressure on the University's
fundraising efforts.
MARKET POSITION/COMPETITIVE STRATEGY: CONTINUED HEALTHY GROWTH OF ENROLLMENT AND
NET TUITION PER STUDENT ESSENTIAL AS ASU BECOMES INCREASINGLY RELIANT ON STUDENT
CHARGES
Moody's Aa3 highest rating on ASU is largely anchored by the
University's healthy market position and robust demographic projections for the
State of Arizona coupled with an expectation that the University will be able to
continue to grow net tuition per student. The University's main campus is
located in Tempe with several other campuses located throughout the Phoenix
metropolitan area, with a total of 69,459 full-time equivalent students (FTE)
enrolled across all campuses in fall 2010. In fall 2010, approximately
two-thirds of the entering freshmen class was drawn from within the state of
Arizona, which benefits from very strong demographic projections for high school
graduation rates in the state over the next decade. Further, the University has
a proven ability to attract students from outside of Arizona, with approximately
46% of total net tuition revenue in FY 2010 generated by out-of-state students.
In fall 2010, enrollment on a headcount basis exceeds 70,000, and FTE of 69,459
represents a 17.6% increase in FTE over fall 2006. Management projects that the
bulk of future enrollment growth will be concentrated at the Downtown Phoenix
and Polytechnic campuses as well as in online programs.
In FY 2010, the University generated $8,090 of net tuition per student
(including Pell Grants), a 12% increase over FY 2009. We expect net tuition per
student to demonstrate strong growth again in FY 2011 as a result of tuition
increases implemented in fall 2010. ASU implemented a nearly 20% tuition
increase for new undergraduate in-state students in fall 2010 and a 5% tuition
increase for new out-of-state undergraduates. Despite these tuition increases,
student demand remained strong, with ASU's freshmen application volume growing
10% over fall 2009. As a result, freshmen selectivity improved to 73%, and the
matriculation ratio (accepted students who chose to enroll) was stable at 37% in
fall 2010. We expect that student charges will continue to grow as a proportion
of the University's overall revenue base, and our stable outlook for the
University heavily incorporates our expectation that student demand will remain
strong and that the University has additional tuition setting flexibility.
ASU is one of three four-year public institutions in the state, with a single
Board of Regents governing the University of Arizona (Aa2), Northern Arizona
University (A1), and ASU. ASU maintains a strong research profile, with
approximately $189 million of research expenses in FY 2010 (representing nearly
14% of FY 2010 expenses). Through FY 2010, ASU had been awarded $60 million of
ARRA research funding (American Recovery and Reinvestment Act). This amount of
research is notable since the University does not have a medical school, and
approximately 73% of the student body is undergraduate.
OPERATING PERFORMANCE: NET TUITION REVENUE GROWTH AND EXPENSE
CONTAINMENT CONTRIBUTE TO IMPROVED OPERATIONS IN FY 2010; STATE FUNDING
REMAINS CHALLENGED
Moody's believes that ASU will be faced with the challenge of
growing alternative revenue streams to compensate for cuts in state funding, in
light of the State's ongoing credit challenges (State of Arizona has an issuer
rating of Aa3 with a stable outlook). ASU experienced a 13.8% cut in state
funding in FY 2009 and another 4% cut in FY 2010. We expect that FY 2011 funding
will be flat with FY 2010, including a very modest amount of ARRA
funding. Further, the State has delayed monthly General Fund appropriations to
the public universities several times, with a deferral of a combined $90.6
million of state support for April, May, and June 2010 until October 1, 2010 per
enacted legislation. Further, in FY 2011, approximately $7.5 million of monthly
state appropriations are being deferred until October 2011 (FY 2012). The
University has budgeted for this deferred cash flow. The recent passage of a
temporary sales tax increase (in place for three years) in Arizona buys the
public universities some immediate relief from further cuts in state operating
support. Given the state challenged economy, state appropriations to higher
education institutions could be pressured in FY 2012.
Moody's maintains an Aa3 issuer rating and stable outlook on the State, which
faces significant tax revenue shortfalls and a structural budget imbalance. For
more information about the State's credit profile, please read our last report
published on July 15, 2010.
ASU has adjusted to these cuts in state funding and uncertainty about future
state funding by focusing on expense containment and continued growth of student
charges. In recent years, ASU has cut expenses, including implementing energy
saving programs, layoffs of adjunct faculty, holding some positions vacant, and
reducing other non-personnel operating costs. By Moody's calculation, ASU's
operating performance has been close to break even in recent years, with a
three-year average operating margin of -0.2% during FY 2007-2009. The operating
margin improved significantly in FY 2010, with a 6% surplus generated.
However, approximately $90 million of state appropriations was deferred until FY
2011. Excluding this deferred cash flow from the state, the University's
operations would be break even and consolidated debt service coverage would be
1.6 times. Although this level of operating performance currently provides
adequate debt service coverage, ASU must continue to grow revenue and remain
focused on expense containment in order to cover growing debt service
responsibilities and possible further reductions in state support.
Moody's believes the University's revenue is fairly well diversified, including
45% of its operating revenue from student charges (net tuition, fee, Pell Grant,
and auxiliary revenue), 29% from state appropriations, 17% from grants
and contracts, and 9% from other sources including gifts and investment income.
The ASU Foundation provided approximately $47 million in FY 2010 in cash
donation transfers and scholarship funding to the University.
BALANCE SHEET POSITION: THIN LIQUIDITY AND HIGH DEBT LEVELS ARE KEY CREDIT
CONCERNS; PRESSURE ON FUNDRAISING
Moody's believes that the University's balance sheet remains highly leveraged as
a result of a fast pace of borrowing to support significant capital expansion in
recent years, limited history of fundraising targeted for endowment, and modest
levels of direct capital support from the State. However, the State does provide
funds for reimbursement of debt service payments on approximately $345 million
of ASU's debt, although the State payment is not guaranteed and the
University is ultimately liable for the debt. To-date ASU has not received any
indication from the State that it would not continue to fund this research
infrastructure debt service. Including the Series 2010 C and D System Revenue
Bonds, the University's pro-forma direct debt (including debt of all component
units) increases to nearly $1.6 billion. FY 2010 expendable financial
resources of $405.9 million would cover pro-forma direct debt a thin 0.25 times,
and maximum annual debt service on the University's System Revenue Bonds and
certificates of participation would represent 7.7% of the University's FY 2010
operating expenses.
The University's debt has increased rapidly in recent years with $1.6 billion of
pro-forma direct debt representing a 44% increase over FY 2006. The University
has longer-term capital and borrowing plans, including construction of a new
building at the College of Business to expand capacity. Total borrowing over
the next two years could total up to $200 million, although we do not anticipate
additional borrowing during FY 2011. The University pays off a large amount of
principal annually, with $119 principal paid off during FY 2008-2010.
In addition to Moody's concerns about the University's total financial resources
and their support for the large amount of debt and sizeable expense base, we
believe that ASU's near-term liquidity is thin and vulnerable to delays in state
operating appropriations. Expendable financial resources in FY 2010 would cover
annual expenses a thin 0.29 times. Further, as of June 30, 2010, ASU (excluding
Foundation and component units) had $285 million of unrestricted cash and
investments which could be liquidated within a one month timeframe. This level
of liquidity would cover 80 days of cash expenses in FY 2010. Management reports
that cash levels declined lower during summer 2010, partly due to deferred cash
funding from the state, with $215 million of cash at the low point during the
summer of 2010. The University does not currently have any operating lines of
credit. With the receipt of the delayed state funding as well as receipt of fall
tuition levels, management reports that current cash balances are more robust,
approximately $350 million.
ASU has historically had a modest fundraising profile with lower
endowment levels than many of its peers. Although the University
demonstrated improved levels of fundraising in recent years ($118 million
of contributions across the Foundation and component units in FY
2008), contribution revenue, per the audited financial statements, dropped in FY
2009 to $33.5 million and $50.4 million in FY 2010. The Phoenix economy has been
hit hard during the recession contributing to pressure on the University's
fundraising efforts. The Foundation's long-term investment pool experienced a
17.8% loss during FY 2009 and a 10.1% positive return in FY 2010. As of October
31, 2010, the Foundation's endowment allocation includes approximately: 19% in
domestic equities 27% in international equities, 14% real assets (including real
estate and commodities), 16% hedge funds, 3% private equity investments, and 21%
in bonds and cash. As of 2010 FYE, unrestricted net assets of ASU's
component units were negative $57.6 million.
Including debt issued during FY 2011, approximately 11% of the University's debt
(including component unit debt) was issued in a variable-rate mode, with close
to $187 million of variable-rate demand bonds supported by letters of credit and
standby bond purchase agreements. In FY 2010, the University's
unrestricted liquidity with monthly liquidity would cover 153% of total
demand debt (including that at the component units). These bank
agreements contain various events of default which if breached could result in
acceleration of the debt and accelerated repayment required by ASU or the
component unit to the bank. The University recently replaced the standby bond
purchase agreement (SBPA) supporting the Series 2008 Sun Devil Energy Center LLC
variable rate demand bonds. The new SBPA is provided by Royal Bank of Canada and
has an expiration date of November 2013.
ASU has relationships with various private developers who have
constructed privatized student housing on the University's Tempe and Phoenix
campuses. The Phoenix project has struggled with weak occupancy, although ASU
management reports that it does not expect to provide financial assistance to
the project above and beyond a formal $3.4 million total guaranty agreement.
Occupancy has improved in fall 2010 with 87% occupancy compared to 59% occupancy
in spring 2010. ASU management anticipates that the balance of the guaranty will
be drawn during the next two years. The University is in the early stages of
developing construction of privatized student housing at its Polytechnic and
West campuses. Ground leases for these projects have not yet been finalized. The
projects are expected to include 300 beds at Polytechnic campus and 350 beds at
the West campus. Moody's continues to monitor the University's involvement in
all of the projects and levels of ongoing support, financial and other. We
continue to view all of these projects as part of the University's broader
credit profile, especially as management explores the possibility of additional
privatized student housing and these facilities become an increasingly large
proportion of the University's overall housing stock. Excluding
privatized student housing projects affiliated with the University, ASU
has 4,335 beds in its owned residential facilities.
Outlook
Moody's stable outlook reflects our expectation that management will continue to
focus on long-term growth of net tuition revenue and expense containment and
that operating cash flow will provide adequate coverage of heightened debt
service responsibilities. We also anticipate that near-term borrowing plans will
be manageable with no additional debt expected to be issued during FY 2011.
What Could Change the Rating - UP
Significant growth of liquid financial resources to better support
increased debt levels and large expense base coupled with strengthening of
operating results, stabilization of state funding, and improved credit profile
of the state
What Could Change the Rating - DOWN
Declines in unrestricted liquidity; demonstrated resistance to tuition increases
and slowed growth of student charges; sustained deterioration of operating cash
flow and debt service coverage; borrowing plans well beyond what have been
outlined by management absent commensurate growth of unrestricted financial
resources and revenue to pay debt service
KEY INDICATORS (Fall 2010 enrollment data and FY 2010 audited financial data):
Total Full-Time Equivalent (FTE) Students: 69,459 FTE
Freshmen Selectivity: 72.8%
Freshmen Matriculation: 37.0%
Total Financial Resources: $831 million (including resources of ASU and its
component units)
Operating Revenue: $1.49 billion
Pro-Forma Direct Debt: $1.6 billion (including all debt of ASU and its component
units)
Expendable Financial Resources-to-Pro Forma Direct Debt: 0.25 times
Expendable Financial Resources-to-Operations: 0.29 times
Unrestricted cash and investments with monthly liquidity (ASU only): $285
million
Monthly Days Cash on Hand (unrestricted funds available within 1 month divided
by operating expenses excluding depreciation, divided by 365 days): 80 days
Three-Year Average Operating Margin: 2.0%
Reliance on Student Charges: 45%
Reliance on State Appropriations: 29%
State of Arizona's Issuer Level Rating: Aa3 with a stable outlook
RATED DEBT
Series 2009 Revenue Bonds (Arizona State University - Tempe Campus Phase II),
issued by Arizona State University Energy Management LLC: A1 rating
Series 2009A and B Arizona State University Nanotechnology LLC Lease
Revenue Refunding Bonds: A1 rating; insured by Assured Guaranty
2008 Arizona State University Energy Center LLC Bonds (Polytechnic
Campus project): A1 rating
Series 2008C, 2009A, 2010A, 2010B, 2010C, 2010D System Revenue Bonds: Aa3 rating
Series 2010 SPEED Bonds: A1 rating
Series 2008 McAllister Village LLC Bonds: A1
Series 2008 A and B System Revenue Refunding Bonds: Aa3 underlying rating;
Aa1/VMIG1 (letter of credit provided by Lloyds TSB Bank PLC; LOC expires June
2012)
Sun Devil LLC, Series 2008: A1 underlying rating; Aa3/VMIG1 (insured by Assured
Guaranty; SBPA provided by Royal Bank of Canada; SBPA expires November 18, 2013)
Series 2005, 2007 A&B System Revenue Bonds: Aa3 rating, insured by Ambac
Student Housing Revenue Refunding Bonds, ASU West Campus, Series 2005: insured
by Ambac
Series 2002, 2003, and 2004 System Revenue Bonds: Aa3 rating, insured by Assured
Guaranty
Series 2006, Series 2005A, Series 2004 Certificates of Participation: A1 rating,
insured by Ambac
Series 2006 Refunding Certificates of Participation: A1 rating, insured by
National Public Finance Guarantee Corp. (formerly MBIA)
Series 2002 Certificates of Participation: A12 rating, insured by National
Public Finance Guarantee Corp. (formerly MBIA)
Series 2004 ASUF Brickyard LLC: Aa3/VMIG1 (LOC: Bank of America; LOC expires
July 2012)
Series 2003 ASU Foundation: insured by Ambac
Student Housing Revenue Bonds, ASU South Campus Series 2003: insured by National
Public Finance Guarantee Corp. (formerly MBIA)
Series 2002 Energy Conservation Bonds: A1 rating, insured by National Public
Finance Guarantee Corp. (formerly MBIA)
Series 2002, Series 2000 System Revenue Bonds: Aa3 rating, insured by FGIC
Series 1999 A&B Certificates of Participation: A2 rating, insured by
National Public Finance Guarantee Corp. (formerly MBIA)
Series 2006 Research Park System Revenue Bonds: insured by Assured Guaranty
Series 1991Certificates of Participation: A2
Series 2000 Student Housing Revenue Bonds (Adelphi Commons): Baa3
CONTACTS:
Arizona State University: Joanne Wamsley, Senior Associate Vice President and
Deputy Treasurer, (480) 965-7228
Financial Advisor: RBC Capital Markets, Kurt Freund, (602) 381-5365
RATING 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, and public 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
Kimberly S. Tuby
Analyst
Public Finance Group
Moody's Investors Service
Amy Tanaka
Backup Analyst
Public Finance Group
Moody's Investors Service
Contacts
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA
MOODY'S ASSIGNS Aa3 RATING TO ARIZONA STATE UNIVERSITY'S $55 MILLION OF SERIES 2010 C AND D SYSTEM REVENUE BONDS AND AFFIRMS RATINGS ON OUTSTANDING DEBT; OUTLOOK IS STABLE
