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04 May 2017
New York, May 04, 2017 -- Issue: Institutional Enterprise Revenue Refunding Bonds Tax - Exempt Series 2017A; Rating: A3; Rating Type: Underlying LT; Sale Amount: $6,170,000; Expected Sale Date: 05/08/2017; Rating Description: Revenue: Public University Broad Pledge;Issue: Institutional Enterprise Revenue Refunding Bonds, Taxable Series 2017B; Rating: A3; Rating Type: Underlying LT; Sale Amount: $1,175,000; Expected Sale Date: 05/08/2017; Rating Description: Revenue: Public University Broad Pledge;
Summary Rating Rationale
Moody's Investors Service has assigned an A3 underlying rating to Adams State University's (ASU) planned $6.2 million of Series 2017A (maturing in 2043) and $1.2 million Taxable Series 2017B (maturing in 2034) Institutional Enterprise Revenue Refunding Bonds to be issued by the Board of Trustees for Adams State University. Concurrently, we have affirmed the existing A3 underlying and Aa2 enhanced ratings on the $50.7 million of outstanding rated bonds. The outlook on the underlying rating is negative, and the enhanced rating is stable.
The A3 rating reflects the university's fair strategic positioning as a designated Hispanic Serving public university in southern Colorado, with positive growth in net tuition revenue and sound liquidity, as well as debt supported by growing designated student fees. New leadership is guiding the ASU 2020 strategic plan, building enhanced recruitment pathways that resulted in stable enrollment for fall 2016. Offsetting challenges include stiff competition for students combined with high reliance on potentially volatile net tuition revenue, and limited state support and available financial resources for strategic investment. A large unfunded pension liability adds further uncertainty for future expense pressures.
In addition, the university's accreditation was placed on probation in February 2016, stemming from oversight concerns pertaining to certain online programming. Remediation will continue to require additional management resources over the next twelve months.
The enhanced rating and outlook is based on the Aa2 rating and stable outlook of the Colorado Higher Education Enhancement Program (the Colorado State Intercept Act), as well as the sufficiency of interceptable revenues and transaction structure. The Series 2017A&B bonds will not be covered by the intercept program.
Rating Outlook
The negative outlook reflects uncertainty regarding the university's ability to successfully balance operating performance due to limited state operating support and variable enrollment. Net tuition growth faces pressure from the high-need student population, a newly instituted guaranteed tuition pricing program, and recent HLC accreditation probation status.The stable outlook for the enhanced rating is based on the state's current stable long-term outlook.
Factors that Could Lead to an Upgrade
Underlying rating: Strengthened and sustained cash flow; significant increase in flexible reserves
Enhanced rating: Upgrade in the enhancement program rating
Factors that Could Lead to a Downgrade
Underlying rating: Sustained deterioration in operating cash flow or weakening of liquidity; inability to grow cash and investments commensurate with peers; or a substantial increase in debt
Enhanced rating: Deterioration in credit quality of the Colorado Higher Education Enhancement Program
Legal Security
ASU's parity outstanding bonds, which include the Series 2009A, 2009B, 2009C, 2012 and 2015 (2015 not rated) bonds, are secured by pledged revenues, which include Net Revenues (Gross Revenue less Maintenance and Operation Expenses) from facilities, including substantially all auxiliary facilities. The pledge also includes 10% of the university's tuition revenues. The bonds are further secured by a pledge of a portion of the College Service Fee, a mandatory student fee of $432 per full time student per academic term and a Capital Construction Debt Service Fee that is scheduled to increase annually until it is capped at $97 per student per credit hour in calendar year 2018. In FY 2016, the combined college service fee and capital construction fee totaled $4.4 million.
The FY 2016 pledged revenues of $6.6 million covered parity gross debt service of $5.0 million by 1.3 times and debt service net of the federal subsidy for Build America Bonds (BABs) of $4.4 million by 1.6 times for fiscal 2016. ASU has a 1.0 times rate covenant. There are no debt service reserve funds.
Prior to the Series 2017 issuance, all of ASU's revenue bonds benefit from the presence of the Colorado Higher Education Enhancement Program (intercept) rating. Upon issuance, the Series 2017A&B bonds will not be covered by the intercept program.
The intercept program is categorized as an unlimited advance. If the university fails to provide sufficient funds, the paying agent is required to notify the state treasurer on the business day immediately prior to the debt service payment date. The treasurer is then required to remit funds to the paying agent, in immediately available funds of the state, the amount necessary to make the debt service payment. Please see our report dated October 22, 2008, for more detail on this program rating.
Use of Proceeds
Proceeds of the proposed Series 2017A and 2017B bonds are expected to be used to refund all or portions of the Series 2009A, 2009B, and 2012 bonds; and to pay costs of issuance.
Obligor Profile
Adams State University is a small regional public university located in Alamosa, Colorado, serving students of the San Luis Valley and designated as a Hispanic Serving Institution. ASU was founded in 1921 as a normal school and has grown to serve a mix of undergraduate, graduate and distance learning programs. In fiscal 2016, the university recorded operating revenue of $55 million and served a fall FTE enrollment of 3,590 students.
Methodology
The principal methodology used in this underlying rating was Global Higher Education published in November 2015. The principal methodology used in this enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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Mary Cooney
Lead Analyst
Higher Education
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Edith Behr
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