New York, May 24, 2017 -- Issue: University Facilities Revenue and Refunding Bonds (Life University, Inc. Project), Series 2017A; Rating: Ba3; Rating Type: Underlying LT; Sale Amount: $87,085,000; Expected Sale Date: 06/27/2017; Rating Description: Revenue: 501c3 Secured General Obligation;
Issue: University Facilities Revenue and Refunding Bonds (Life University, Inc. Project), Federally Taxable Series 2017B; Rating: Ba3; Rating Type: Underlying LT; Sale Amount: $10,135,000; Expected Sale Date: 06/27/2017; Rating Description: Revenue: 501c3 Secured General Obligation;
Summary Rating Rationale
Moody's Investors Service has assigned a Ba3 rating to the proposed $97 million Series 2017A and Federally Taxable Series 2017B bonds. We have also affirmed the Ba3 rating on Life University's (GA) Series 2008 Revenue and Refunding Bonds. The Marietta Georgia Development Authority is the issuer of the new and prior bonds. The outlook is stable.
The Ba3 rating incorporates Life University's solid niche as a provider of chiropractic education, established record of revenue growth and budgetary discipline. These strengths are tempered by 97% reliance on student charges combined with niche program focus yielding extremely limited revenue diversity, low donor support, and uncommonly high financial leverage.
The current plan of finance provides for a reasonably affordable means for the university to upgrade its undergraduate student housing aided by savings from a refunding of the prior bonds. While the potential increased demand for undergraduate programs remains unproven and the project entails construction and timing risk, the enhanced facilities will aid Life's ongoing efforts to increase its undergraduate enrollment and enhance programmatic diversity.
The stable outlooks incorporates expectations of measured revenue growth over the next one to two years combined with strong operating performance and stable to growing unrestricted liquidity. While the planned investment in undergraduate student housing will enhance the marketability of the university, the construction period does entail some risks with regard to cost and timing. The construction risk will be partially mitigated through a guaranteed maximum price contract with an experienced general contractor.
Factors that Could Lead to an Upgrade
Completion of student housing project on time and on budget combined with meaningful evidence of increased demand for undergraduate programs
Ongoing revenue growth and ability to generate debt service coverage well above 1.2 time covenant as debt service commitments increase
Prospects for ongoing increase in unrestricted liquidity
Factors that Could Lead to a Downgrade
Disruption in student demand
Weakening of operating performance and debt service coverage
Diminishment of unrestricted liquidity
The Series 2017A and Series 2017B bonds are secured by a gross revenue pledge, first mortgage pledge of university real property and cash funded debt service reserve fund equal to maximum annual debt service. Other features include a debt service coverage rate covenant of 1.2 times. A small portion of the campus near the planned new student housing will be carved out of the mortgage pledge for these bonds that could support a future P3 or alternative finance mechanism for additional student housing facilities. There is also a Liquidity Covenant of 80 Days Cash on Hand as well as a Long-Term Indebtedness Ratio requirement of at least 0.15 times and an accounts payable covenant.The Days Cash on Hand calculation based on June 30, 2016 data was 146 days compared to the 80 day requirement. The Long-Term Indebtedness Coverage Ratio was 0.36 times as compared to 0.15 times requirement. On a pro forma bases, March 2017 unrestricted cash and investments cushioned pro forma debt by 0.24 times. There is also a Trades Payable Covenant of at least 90% of payables at less than 60 days. As of March 2017, 99% of payables were less than 60 days old. Failure to meet the required covenants would trigger the university's need to engage a consultant. Under some scenarios covenant violation would trigger a springing lock box.
The Series 2008 bonds are secured by a gross revenue pledge, first mortgage pledge of university real property and cash funded debt service reserve fund equal to maximum annual debt service. Other features include a debt service coverage rate covenant of 1.2 times.Failure to meet the required covenants in any two consecutive calendar quarters would trigger the university's requirement to transfer all Revenues to the Trustee on a daily basis.
Use of Proceeds
Proceeds from the Series 2017A and Series 2017B bonds will fund an escrow fund of approximately $70 million to defease the Series 2008 bonds, fund a $26 million construction fund for a student housing and dining project, fund a $7.3 million debt service reserve fund, deposit $2.6 million toward capitalized interest and pay costs of issuance.
Life University was founded in 1974 as a private university in the Atlanta suburb of Marietta, Georgia. The majority of students are enrolled in its doctoral degree program in chiropractic. The university also offers undergraduate and graduate programs in health and wellness-oriented fields. Operating revenue was $61 million in fiscal 2015.
The principal methodology used in this rating was Global Higher Education published in November 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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