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Rating Action:

Moody's Assigns A2 Underlying and Aa3 Enhanced to Western Kentucky's 2016 Series B&C; Outlook Stable

28 Sep 2016

New York, September 28, 2016 -- Issue: General Receipts Bonds, 2016 Series B (Parking Garage Project); Rating: A2; Rating Type: Underlying LT; Sale Amount: $9,490,000; Expected Sale Date: 10/11/2016; Rating Description: Revenue: Public University Broad Pledge;

Issue: General Receipts Bonds, 2016 Series B (Parking Garage Project); Rating: Aa3; Rating Type: Enhanced LT; Sale Amount: $9,490,000; Expected Sale Date: 10/11/2016; Rating Description: Revenue: Public University Broad Pledge;

Issue: General Receipts Refunding Bonds, 2016 Series C; Rating: A2; Rating Type: Underlying LT; Sale Amount: $29,325,000; Expected Sale Date: 10/11/2016; Rating Description: Revenue: Public University Broad Pledge;

Issue: General Receipts Refunding Bonds, 2016 Series C; Rating: Aa3; Rating Type: Enhanced LT; Sale Amount: $29,325,000; Expected Sale Date: 10/11/2016; Rating Description: Revenue: Public University Broad Pledge;

Summary Rating Rationale

Moody's Investors Service has assigned A2 underlying and Aa3 enhanced ratings to Western Kentucky University's (WKU) proposed $9.5 million of fixed rate General Receipts 2016 Series B (maturing 2037) and $29.3 million of fixed rate refunding 2016 Series C (maturing 2028) bonds. At the same time, Moody's affirmed the A2 underlying and Aa3 enhanced ratings on $138 million of outstanding general receipt bonds and the A3 rating on $13.7 million of outstanding lease revenue bonds for the Alumni Square Project issued by Warren County, Kentucky. The outlook is stable. The A2 underlying rating reflects WKU's sizeable scope of operations and steady net tuition revenue growth as a large comprehensive regional public institution serving central Kentucky. The rating is tempered by high leverage, weak liquidity and a large unfunded pension liability. Given recent trends of declining operating performance, softening enrollment, ongoing capital needs, and Commonwealth of Kentucky (Aa2 stable issuer rating) appropriation cuts, WKU will be challenged to rebuild financial reserves in a meaningful manner. The A3 rating on the County of Warren Series 2013 Lease Revenue Bonds (WKU Alumni Square Project) is a one-notch distinction from the A2 senior-most secured general receipts pledge, reflecting the subordinate unsecured general receipts pledge and non-cancelable lease structure with no abatement risk, as well as the more limited essentiality of the building to the university.The Aa3 enhanced rating and stable outlook are derived from the structure and mechanics of the Kentucky Public University Intercept Program, which is based on the Commonwealth of Kentucky issuer rating and outlook.

Rating Outlook

The stable outlook reflects our expectation that WKU will translate its size and program diversity to continue to generate high single to low double-digit cash flow margins, providing sufficient debt service coverage. The stable outlook also assumes no additional debt without commensurate resource and revenue growth. Over the longer term, failure to improve liquidity or refinance the $75 million of Student Life Foundation debt as the mandatory tender date of 2020 draws closer could lead to additional rating pressure. The stable outlook on the enhanced rating is based upon the commonwealth's currently stable outlook.

Factors that Could Lead to an Upgrade

Underlying rating: Strengthened and sustained cash flow; substantial deleveraging and rise in flexible reserves

Enhanced rating: Upgrade in the Commonwealth of Kentucky rating

Factors that Could Lead to a Downgrade

Underlying rating: Continued deterioration of liquidity; substantial increase in debt; trend of declining operating cash flow

Enhanced rating: Deterioration in credit quality of the Commonwealth of Kentucky; Insufficient debt service coverage by interceptable funds

Legal Security

The General Receipts Bonds are secured by a pledge of substantially all unrestricted revenue, including tuition and fees, gross state operating appropriations, unrestricted grants and contracts, sales and services of educational activities, and investment income. Aggregate pledged revenues totaled $250 million in FY 2015 providing pro forma maximum annual debt service ($13.8 million) coverage of over 18 times. The university's general receipts bonds benefit from the presence of a state intercept program. If the university fails to make debt service payments 10 days in advance of the debt service payment date, the Secretary of the Finance and Administration Cabinet of the Commonwealth is obligated to use any funds that have been appropriated to the university but not yet expended to make debt service payments. WKU's General Receipts debt service payments are due in multiple periods (September, November, March, and May). Given that the final May payment must be with the trustee 10 days in advance of the payment date, we are reasonably assured that sufficient non-distributed, legislatively adopted state appropriations will be available for intercept. Debt service coverage is calculated by dividing interceptable state aid available to pay the remaining periodic debt service payments. For WKU, this calculation results in a pro forma peak debt service coverage of 2.8 times which is strong sufficiency.The university is also responsible for two series of debt that were issued on behalf of WKU by conduit issuers. The first are the fixed rate Series 2013 Lease Revenue Bonds issued by Warren County, Kentucky, for construction of an office building and parking garage and leased to the university. WKU has subleases in place for occupants of the building, with lease payments to the county payable a month prior to debt service payments.The second debt obligation was issued on behalf of WKU by the City of Bowling Green, Kentucky (Aa2). Proceeds of the outstanding fixed rate Series 2010 general obligation and special revenue bonds supported construction of the university's Diddle Athletic Arena. The bonds are secured by both the G.O. unlimited tax pledge of the city of Bowling Green as well as special revenues derived from student athletic fees and arena suite rentals, which have historically been sufficient to cover the bonds. In FYs 2015-16, fee revenue of $3.7 million and $4.1 million, respectively, was more than sufficient to cover maximum annual debt of $2.9 million.Debt held by the WKU Student Life Foundation and used solely for housing projects currently totals $75 million. During fiscal 2016, the foundation issued $79 million in variable rate direct placement debt with J.P. Morgan Chase Bank, N.A to refund its Series 2000 debt, Series 2008 debt, and an outstanding construction line. The debt is legally an obligation of the Student Life Foundation and there are no cross default provisions with the university's debt. There are multiple covenants in addition to a mortgage on Student Life Foundation assets. Covenants include: 1.25 times debt service coverage, 120 days cash on hand, a repair and replacement fund of almost $2 million, a separate debt service reserve fund of $6.5 million, and an additional bonds test of 1.3 times debt service coverage. Failure to adhere to certain covenants, including financial ratio covenants, would constitute an event of default, which would give the bank an opinion to declare the debt to be immediately due and payable. As of its most recent filing (March 31, 2016), the foundation was in compliance with all covenants. In addition to the financial ratio covenants, the foundation also must adhere to other strict requirements governing capital expenditures, the payment of legal settlements, and financial reporting. The first mandatory tender for the bonds is June 2020 and the bonds mature in 2030 with a $12 million bullet payment.

Use of Proceeds

Proceeds of the Series 2016B bonds will be used for the construction and equipping of a campus parking facility and to pay costs of issuance. Proceeds of the Series 2016C bonds will used to refund portions of the outstanding Series 2009A bonds and to pay costs of issuance.

Obligor Profile

Located in Bowling Green, Kentucky, Western Kentucky University was established as a normal school in 1907, before becoming a comprehensive four-year university in 1966. The university offers both undergraduate and graduate degrees, addressing the educational needs of the region through several branch campuses and online. In FY 2015, WKU recorded operating revenues of $306 million and for fall 2015 served an FTE enrollment of 16,143 students.

Methodology

The principal methodology used in the underlying rating was Global Higher Education published in November 2015. The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. An additional methodology used in the Series 2013 Revenue Bonds was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mary Cooney
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Eva Bogaty
Additional Contact
Higher Education
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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