New York, June 22, 2016 -- Issue: General Obligation Lease Revenue Bonds (Atlantic City Campus Project), Series 2016A; Rating: Baa1; Rating Type: Underlying LT; Sale Amount: $70,000,000; Expected Sale Date: 07/11/2016; Rating Description: Revenue: Public University Broad Pledge;Issue: Revenue and Refunding Bonds, Stockton University Issue, Series 2016 A; Rating: Baa1; Rating Type: Underlying LT; Sale Amount: $215,000,000; Expected Sale Date: 06/27/2016; Rating Description: Revenue: Public University Broad Pledge;
Summary Rating Rationale
Moody's Investors Service has downgraded Stockton University's rating to Baa1 from A3 and assigned a Baa1 rating to the planned issuance of two series of debt: approximately $215 million in New Jersey Educational Facilities Authority Revenue and Refunding Bonds, Stockton University Issue, Series 2016A (maturity 2041); and $70 million in Atlantic County Improvement Authority Stockton University General Obligation Lease Revenue Bonds, Series 2016A (maturity 2048). The outlook is negative.
The downgrade reflects already high and increasing leverage as Stockton expands into an unproven market with the establishment of an Atlantic City campus. Deficit operations and thinning cash flow inhibit flexibility as the university pursues expansion in an environment further constrained by uncertain state funding. The rating favorably incorporates Stockton's role as a mid-sized regional public university with a niche hospitality program, recent enrollment growth, and still good, albeit weakening, liquidity position.
The negative outlook reflects ongoing pressure on several fronts as Stockton expands into Atlantic City and as state funding remains challenged. Inability to strengthen currently weak cash flow to support debt service in such an environment could negatively impact the rating.
Factors that Could Lead to an Upgrade
Sustained strengthening of operating cash flow leading to significantly stronger debt service coverage
Growth in flexible reserves for additional cushion to debt and operations
Successful completion of Atlantic City expansion and attainment of revenue and enrollment projections
Deleveraging in combination with improved financial resources
Strengthening of the state's credit quality combined with indication that operating and employee benefit payments will be sustained
Factors that Could Lead to a Downgrade
Ongoing weak operating performance and diminished debt service coverage
Additional borrowing absent improvement in operating cash flow
Significant further deterioration of liquidity
Inability to grow net tuition revenue
Material reductions in state operating, pension, or health care support
All rated debt is a general unsecured obligation of the university. There are no debt service reserve funds and no pledged mortgages of university assets.
The Lease Revenue Bonds are payable by the ACIA from payments to be made by Island Campus. Island Campus, in turn, will have a long-term lease agreement with Stockton University that obligates Stockton to make general obligation lease payments equal to the debt service payments on the Lease Revenue Bonds. The obligation of Stockton to pay fixed rent is a direct and general obligation of Stockton, not subject to set-off of any form, and the full faith and credit of Stockton are irrevocably and unconditionally pledged for the payment of fixed rent.
Island Campus, a sole purpose corporation, is expected to assign its right to receive payments to the ACIA. In turn, the ACIA is expected to assign its right to receive these payments to the trustee for the bondholders. Counsel to Island Campus is expected to render an opinion that the fixed rent payments would not be considered part of the bankruptcy estate in the event of a bankruptcy of Island Campus.
Use of Proceeds
Proceeds from the New Jersey Educational Facilities Authority Revenue and Refunding Bonds, Stockton University Issue, Series 2016A, are expected to refund all or a portion of the Series 2006F, 2007G, and 2008A bonds, to fund capital projects on Stockton's Galloway campus, and to pay costs of issuance.
Proceeds from the Atlantic County Improvement Authority Stockton University General Obligation Lease Revenue Bonds, Series 2016A, are expected to be used to finance a portion of the costs of a new residence hall in Atlantic City ($62.5 million), a parking garage ($7 million), to fund capitalized interest, and to pay costs of issuance.
Stockton University is a four-year university offering undergraduate and graduate degrees, with its main campus located in Galloway, New Jersey, approximately eight miles west of Atlantic City. Stockton has multiple locations in the Ocean County region, including the Stockton Seaview resort and golf course. In FY 2015, the university recorded operating revenues of $198 million and enrolled approximately 8,200 full-time equivalent 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 Downgrades Stockton University, NJ to Baa1 and Assigns Baa1 to Series 2016 Issues; Outlook Negative
Moody's Investors Service, Inc.
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New York, NY 10007