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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

08 Dec 2010

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
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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
No Related Data.
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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