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Rating Action:

Moody's Downgrades Kentucky Community and Technical College System to Aa3 and Assigns Aa3; Outlook Stable

17 May 2016

New York, May 17, 2016 -- Issue: State Property and Buildings Commission Agency Fund Revenue Bonds, Project No. 114; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $43,200,000; Expected Sale Date: 05/23/2016; Rating Description: Revenue: Public University Broad Pledge

Issue: State Property and Buildings Commission Agency Fund Revenue Bonds, Project No. 114; Rating: Aa3; Rating Type: Enhanced LT; Sale Amount: $43,200,000; Expected Sale Date: 05/23/2016; Rating Description: Revenue: Public University Broad Pledge

Summary Rating Rationale

Moody's Investors Service has assigned a Aa3 underlying and Aa3 enhanced rating to the Kentucky Community and Technical College System's (KCTCS) planned $43.2 million Project 114 Agency Revenue Bonds (maturing 2035) to be issued through the Commonwealth of Kentucky State Property and Buildings Commission (SPBC). At the same time, Moody's has downgraded the KCTCS issuer rating to Aa3 from Aa2. The A1 rating on the City of Versailles TI/KCTCS Public Properties, Inc. First Mortgage Revenue Refunding Bonds, Series 2006 and First Mortgage Revenue Bonds, Series 2006B has been affirmed. The outlook on the underlying and enhanced ratings is stable.

The issuer rating downgrade to Aa3 incorporates the planned significant increase in debt, with the anticipated authorization of $145.5 million to be fully issued by fiscal 2017. The downgrade further reflects the system's sustained enrollment declines and narrowing operating cash flow exacerbated by recent state appropriation cuts.

The system's senior-most Aa3 reflects its important role as the largest provider of two-year public higher education in the Commonwealth of Kentucky (Aa2 stable), diversified among 16 colleges, with a large scope of operations and state operating support providing one-third of operating revenues. Ample financial reserves and consistent, as well as a fully funded OPEB plan, also support the Aa3. Challenges facing KCTCS include a competitive student market, decreasing net tuition revenue, and planned state appropriation cuts that will require close expense oversight.

The A1 rating on the City of Versailles TI/KCTCS Public Properties Corporation First Mortgage Revenue Bonds, Series 2006 and 2006B, which is a one-notch distinction from the Aa3 issuer rating, reflects the biennially renewable lease structure, partially mitigated by the essentiality of the property as the system's building headquarters.

The Aa3 enhanced rating is derived from the structure and mechanics of the Kentucky Public University Intercept Program, which is based on the commonwealth's current rating and outlook, combined with the sufficiency of interceptable funds.

Rating Outlook

The stable outlook reflects expectations that the system will budget prudently to generate at least balanced operations and good coverage of the current and near term planned debt, with limited use of financial reserves beyond that currently expected for the BuildSmart initiative.

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 growth in net tuition revenue and stable state operating support leading to sustained improvements in cash flow and financial reserves

Enhanced rating: Upgrade in the Commonwealth of Kentucky's rating

Factors that Could Lead to a Downgrade

Underlying rating: Erosion of liquidity or narrowed operating cash flow margins (Moody's adjusted) of less than 5%

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

Legal Security

The proposed SPBC Agency Fund Revenue Bonds, Project No. 114 are secured under a lease between the system and the Kentucky SPBC, and a pledge of KCTCS of its General Receipts to pay its obligations under the lease. The general receipts include student tuition and fees, nongovernmental grants and contracts, sales and services, other operating revenues, state appropriations, and investment income. KCTCS does not currently have any debt outstanding that would be on a parity with the general receipts pledged.

The Series 2006 (refunding) and 2006B (new project) bonds ($4.74 million outstanding at 6/30/2015) were issued through the City of Versailles TI/KCTCS Public Properties, Inc. (the corporation). The project is the system's headquarters building, which serves an essential purpose, and further, is required to be located in Versailles. Both the 2006 and 2006B bonds are secured by the corporation's interest in a lease agreement between the corporation and KCTCS. The lease agreement renews without affirmative action by KCTCS. The Series 2006 and 2006B bonds are further secured by a foreclosable first mortgage lien on the building and by a first pledge of the rents and revenues of the corporation. KCTCS has a long-term purchase option for the building following a 20 year lease term.

The system's planned Project 114 Agency Revenue bonds are expected to benefit from the presence of a state intercept program. If the system 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 system but not yet expended to make debt service payments.

Given that KCTCS's General Receipts debt service payments are due October 1 and April 1, and that the payments must be with the trustee 10 days prior to the April 1 quarterly distribution of operating appropriations, we are reasonably assured that sufficient non-distributed, legislatively adopted state appropriations will be available for intercept. Peak periodic debt service coverage is calculated by dividing interceptable state aid available to pay the remaining periodic debt service payments. For KCTCS, this calculation results in an estimated pro forma peak debt service coverage of over 35 times (accounting for the 4.5% FY 2017 appropriation cut) which is strong sufficiency. Including the full authorized par amount of $145.5 million, peak debt service coverage is projected at a still strong roughly 4 times.

Use of Proceeds

Proceeds of Project 114 revenue bonds, the first of three related bond tranches, will be used for campus building or renovation projects among its 16 campuses. The current bonds are expected to fund projects at six campuses and pay costs of issuance.

Obligor Profile

The Kentucky Community and Technical College System was created in 1997 to consolidate Kentucky's two-year postsecondary and technical colleges. The system is comprised of 16 colleges across the state, with curriculum offered at 70 campuses. For fiscal 2015, KCTCS recorded $531 million and served an annual unduplicated headcount enrollment of 116,614 students.

Methodology

The principal methodology used in the underlying rating was Moody's Approach for Evaluating Community Colleges published in December 1999. An additional methodology used in the underlying rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. 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 rating action on the support provider and in relation to each particular 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

Dennis Gephardt
Additional Contact
Higher Education
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades Kentucky Community and Technical College System to Aa3 and Assigns Aa3; Outlook Stable
No Related Data.
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