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Rating Action:

MOODY'S ASSIGNS Aa3 RATING TO SIMON FRASER UNIVERSITY'S $150 MILLION DEBT OFFERING; OUTLOOK STABLE

27 May 2003
MOODY'S ASSIGNS Aa3 RATING TO SIMON FRASER UNIVERSITY'S $150 MILLION DEBT OFFERING; OUTLOOK STABLE

THIS IS UNIVERSITY'S INITIAL DEBT RATING

New York, May 27, 2003 -- Moody's Investors Service has assigned an Aa3 rating with a stable outlook to Simon Fraser University's (SFU) $150 million Senior Unsecured Debentures, Series 2003. The debentures are an unsecured general obligation of the University and will be used to finance a variety of projects including student housing and recreation facilities, parking, and research buildings. The debentures are structured with a forty year bullet maturity.

The Aa3 rating and stable outlook reflects SFU's:

--Very strong student market position and growing enrollment derived from its academic reputation and favorable location in British Columbia's high growth region;

--Good levels of financial reserves expected to continue to be bolstered by fundraising, property development, and accumulated operating surpluses; and

--Consistently favorable operating performance with significant financial flexibility derived from the recent deregulation of tuition.

STRONG STUDENT MARKET POSITION AND GROWING ENROLLMENT

We believe SFU enjoys a very strong student demand position that is expected to contribute to ongoing enrolment growth and fiscal stability. Total full-time equivalent enrollment now stands at over 18,000 students, reflecting a 16% increase over the past five years. With limited higher education capacity in the Province and an increasing number of students seeking a higher education degree, SFU is likely to continue this growth pattern.

British Columbia has the second highest projected growth in the nation (after Ontario) in the 18-24 year old population combined with the lowest number of university spaces on a per capita basis. As a result, SFU is likely to remain highly selective, accepting just half of applications, with a strong yield rate of nearly 50%. This deep applicant pool ensures that SFU will be able to maintain targeted enrollment. The limited number of university spaces leads many students to begin their university careers at two-year colleges, so that SFU draws a mix of first-time students and transfers.

As one of the nation's leading comprehensive universities, SFU offers a broad array of academic and research programs that should continue to supports its reputation and ability to attract high quality students. The University has five faculties (Arts, Science, Applied Science, Business Administration, and Education) and is also well known for its extensive co-op education programs. Its three campuses are favorably located in Vancouver's high growth region. SFU's latest campus, SFU Surrey, previously, functioned as the Technical University for British Columbia (Tech BC) and is expected to provide innovative programs in information technology, interactive arts, and business. While SFU Surrey's enrollment is currently small at 580 students, it is well-positioned to grow substantially assuming appropriate provincial funding for students and facilities due to its location in the high growth population area of Greater Vancouver.

Among the comprehensive universities, SFU has one of the stronger research programs, garnering $35 million in research awards from a mix of funding sources, including federal, provincial, and private. Research is also favorably diversified across departments. With recent significant federal and provincial investment in research, the University's research program has increased by approximately 75% over the past five years, with further growth anticipated as the University invests in expanded research facilities.

FINANCIAL RESERVES PROVIDE HEALTHY OPERATING AND DEBT CUSHION AND ARE EXPECTED TO CONTINUE GROWING

We believe SFU's financial reserves provide it with good financial flexibility. Total financial resources at the end of FY2002 were in excess of $180 million, fully covering outstanding debt. Endowment performance has been favorable with a modest 0.7% loss in FY2001 followed by a 7.6% gain in FY2002. Just over 60% of the University's resources are unrestricted, which would enable the University to fully redeem nearly two-thirds of its pro-forma debt or cover nearly five months of operating expenses. Beyond the current issue, the University has no additional medium-term borrowing plans. As a result, the University's leverage profile should continue to improve given anticipated ongoing resource growth.

As a newer university, SFU has a less-established fundraising record, and therefore lower resource levels than the other major in-province university, the University of British Columbia (Aa2, $800 million of total resources). Nonetheless, we expect reserves to continue increasing from a mix of sources. Fundraising has been growing steadily in recent years, now reaching over $15 million in gifts annually. The University is in the midst of a 6 year, $100 million fundraising initiative timed to coincide with its 40th anniversary (2005). As SFU's relatively young alumni population matures, we expect fundraising to continue growing, particularly given further investment in development infrastructure.

Additionally, the University is beginning to develop surplus land at its Burnaby Mountain Campus for mixed use residential/retail, and office space in a development called "UniverCity". Management projects that over the 20 years of planned UniverCity development, in excess of $100 million will be added to the University's endowment funds. The first phase of development is scheduled to be completed in 2008, netting SFU $28 million of revenues after development costs.

Finally, the University's relatively strong unrestricted liquidity position is derived from a consistent track record of generating and retaining operating surpluses, a trend we expect will continue for the foreseeable future.

UNIVERSITY HAS AN ESTABLISHED TRACK RECORD OF PRUDENT FINANCIAL MANAGEMENT

SFU's history of accumulated operating surpluses highlights its track record of prudent financial management and stability. With stable provincial funding, growing enrolment and research, and tuition deregulation, we expect SFU to be able to continue generating positive operating performance contributing to net asset growth.

The University at this point remains relatively reliant on provincial funding, which provides nearly 50% of SFU's operating revenues. This highlights some potential vulnerability to any changes in government funding practice and policy. However, we expect that the University's reliance on the government will decline over the next several years as a result of tuition deregulation and limited growth in new provincial dollars. Moreover, the University's healthy unrestricted reserves provide a significant degree of financial flexibility.

Following a six year period of frozen tuition, the province shifted to a fully deregulated tuition policy last year under a new government. As a result of the freeze, tuition levels in British Columbia are very low compared to the Canadian national average. SFU is raising its tuition substantially, implementing a 30% increase in fall of 2002 and approving a further 30% increase for fall 2003. The University expects tuition to reach the national average by 2005. Given the strong level of demand, we believe SFU would have the ability to raise tuition even more if necessary to maintain fiscal balance and academic quality, without impacting enrolment.

RATING OUTLOOK

The stable rating outlook over a two-three year time horizon is based on our expectation that the University will be able to maintain growing enrollment and research funding, with ongoing fiscal stability, moderately growing reserves, and limited additional borrowing. Over the longer term, if the University is successful in increasing fundraising, accomplishing its property development objectives, and growing resources, with continued strong demand and favorable operating performance, credit quality could improve.

KEY FACTS (fiscal 2002 financials, fall 2002 enrollment)

Total FTE enrollment: 18,365

Total Pro-Forma Debt: $173 million

Total Financial Resources: $181 million

Expendable Resources to Debt: 0.82 x

Expendable Resources to Operations: 0.5 years

Three-Year Average Operating Margin: 3.3%

Estimated Average Peak Debt Service Coverage: 2.2 times (excludes bullet maturity)

Reliance on the Province: 48%

CONTACTS:

SFU: Jim Boyd, Treasurer, 604-291-4013

Financial Advisor: Murray Neal, Scotia Capital, 416-863-7438

New York
Susan Fitzgerald
Senior Vice President
Public Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andrew J. Kriegler
Managing Director
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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