New York, April 25, 2016 -- Issue: McAllister Academic Village Revenue Refunding Bonds (Hassayampa AV Project), Series 2016; Rating: A1; Rating Type: Underlying LT; Sale Amount: $121,000,000; Expected Sale Date: 05/02/2016; Rating Description: Revenue: Public University Broad Pledge
Summary Rating Rationale
Moody's Investors Service has assigned an A1 rating to Arizona State University's (ASU) $121 million of fixed rate Revenue Refunding Bonds (ASU Hassayampa Academic Village Project), Series 2016 (maturing in 2039) to be issued through the McAllister Academic Village LLC. The outlook is positive.
The university's seniormost Aa3 rating reflects ASUs role as a large and growing comprehensive multi-campus public university. ASU has strategically invested in a multitude of programs, including on-line delivery systems, resulting in strengthened and more diversified student demand. ASU generates strong operating cash flow, a portion of which has been retained to improve historically moderate reserve levels. These strengths are offset by comparatively high leverage, and weak operating and capital support from the State of Arizona (Aa2 issuer rating stable).
The A1 one-notch differential on the Series 2016 McAllister Academic Village Revenue Refunding Bonds from the university's Aa3 rating is based on the legal structure of the transaction (lease payments subject to annual appropriation), the size and scope of the project, and ASU's role in managing the housing. The bonds will be issued through McAllister Academic Village LLC, whose sole member is the Arizona Capital Facilities Finance Corporation (ACFFC), a component unit of Arizona State University.
The positive outlook reflects our expectation that the university's market momentum will continue to translate into strong operating cash flow and reserve growth.
Factors that Could Lead to an Upgrade
Further improvement in financial resources relative to debt and operations
Sustained healthy operating performance even as the university continues to invest in growth
Factors that Could Lead to a Downgrade
Borrowing plans well beyond those outlined by management
Material and sustained weakening of operating performance
Deterioration of liquidity
The System Revenue Bonds ($1.1 billion at FY-end 2015) are payable from and secured by a pledge of and first lien on Gross Revenues, which include tuition, fees, and other revenue-producing facilities, including auxiliary enterprises and indirect cost recovery. In FY 2015, Gross Revenues totaled $1.3 billion, which comprised 65% of the $2.0 billion of university operating revenue. The System Revenue Bonds carry a rate covenant requiring the university to set fees such that Gross Revenues are at least 1.5 times maximum annual debt service (MADS) of the SRBs. Gross revenues cover the estimated pro forma SRB gross MADS of $90 million over 14 times.
The McAllister Academic Village LLC outstanding Series 2008 (and planned Series 2016) bonds' debt service is paid from pledged revenues, which include income derived from operation of the facility as well as rent payments made by ASU pursuant to a university lease, including 8.6% of annual debt service, for leased academic, retail, and food service space within the facility. The university lease payments are subject to annual appropriation by ABOR.
Further, pursuant to a contingent debt service and operating expense assurance agreement, ASU must pay to the trustee any amount necessary to ensure that adequate funds are available to make each debt service payment and must also provide operating expense assistance to the project if necessary. Although these obligations are unconditional for the then current fiscal year, they are subject to annual appropriation. A leasehold deed of trust assigns all leases and rent payments (including those made by ASU under the university lease) to the bond trustee, as well as conveys all interest in the trust property (including the facility itself) to the trustee to secure payment of the Series 2008 and planned Series 2016 bonds.
Use of Proceeds
Proceeds of the Series 2016 bonds are expected to be used to refund a portion of the outstanding Series 2008 McAllister Academic Village LLC bonds, and to pay costs of issuance.
Arizona State University is a multi-campus, comprehensive public research university, located within the Phoenix metropolitan area. The university had FY 2015 operating revenue of $2 billion and served a fall 2015 headcount enrollment of over 90,000 students.
The principal methodology used in this rating was Global Higher Education published in November 2015. An additional methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
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Moody's Assigns A1 to Arizona State Univ's $121M Ser 2016 Issued By McAllister Acad. Vill.; Outlook Positive
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007