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Global Credit Research - 22 Nov 2016
New York, November 22, 2016 -- Issue: General Receipts Refunding Bonds, 2016 Series F; Rating: A1; Rating Type: Underlying LT; Sale Amount: $28,985,000; Expected Sale Date: 12/06/2016; Rating Description: Revenue: Public University Broad Pledge;
Issue: General Receipts Refunding Bonds, 2016 Series F; Rating: Aa3; Rating Type: Enhanced LT; Sale Amount: $28,985,000; Expected Sale Date: 12/06/2016; Rating Description: Revenue: Public University Broad Pledge;
Issue: Taxable General Receipts Bonds, 2016 Series E; Rating: A1; Rating Type: Underlying LT; Sale Amount: $5,515,000; Expected Sale Date: 12/06/2016; Rating Description: Revenue: Public University Broad Pledge;
Issue: Taxable General Receipts Bonds, 2016 Series E; Rating: Aa3; Rating Type: Enhanced LT; Sale Amount: $5,515,000; Expected Sale Date: 12/06/2016; Rating Description: Revenue: Public University Broad Pledge;
Issue: General Receipts Bonds, 2016 Series D; Rating: A1; Rating Type: Underlying LT; Sale Amount: $46,885,000; Expected Sale Date: 12/06/2016; Rating Description: Revenue: Public University Broad Pledge;
Issue: General Receipts Bonds, 2016 Series D; Rating: Aa3; Rating Type: Enhanced LT; Sale Amount: $46,885,000; Expected Sale Date: 12/06/2016; Rating Description: Revenue: Public University Broad Pledge;
Summary Rating Rationale
Moody's Investors Service has assigned A1 underlying and Aa3 enhanced ratings to the University of Louisville's (UofL) planned fixed rate General Receipts Bonds, including $46.9 million of 2016 Series D (maturing 2036), $5.5 million of Taxable 2016 Series E (maturing 2023), and $29.9 million of Refunding 2016 Series F (maturing 2028). At the same time we have downgraded to A1 from Aa3 the underlying ratings on $210 million of outstanding revenue bonds and affirmed the Aa3 enhanced ratings on $120 million of outstanding revenue bonds. The outlook on the underlying rating is stable at the lower rating level. The outlook on the enhanced rating is also stable.
The downgrade to A1 reflects the university's weakening operating, wealth and liquidity measures, providing more limited financial flexibility concurrent with material governance and management transitions. Narrowing margins and declining cash and investments are the result of flat top line tuition revenue growth and reductions in state operating support. Ongoing legal challenges and leadership changes add distraction and reputational risk to UofL's forward operations.
The A1 underlying rating incorporates the university's large scope of operations, good brand recognition as a comprehensive, urban university that participates in NCAA Division I sports, growing research profile, and improving profitability of healthcare operations. The rating is constrained by a decentralized management structure that limits the university's ability to improve its narrow operating performance and reductions in operating support from the Commonwealth of Kentucky (Aa2 stable issuer rating). Rising age of plant indicates future needs for capital reinvestment.
The Aa3 enhanced rating and stable outlook, are derived from the state commitment, program history, and program structure related to the Kentucky Public University Intercept Program, (Aa3 stable) as well as sufficiency of interceptable revenues and transaction structure related to UofL's bonds.
The stable outlook reflects expectations that the university will address governance and leadership transitions for long term stability, adopt cohesive strategic and fiscal multi-year planning leading to operating improvement. The stable outlook at the lower level also incorporates potential progress on capital improvements over the next few years to meet enrollment, research and healthcare needs.
Factors that Could Lead to an Upgrade
Underlying rating: Strengthened and sustained cash flow resulting in sizeable growth in flexible reserves and liquidity; Consistently improved growth in net tuition revenue; Stability and balance in governance and leadership
Enhanced rating: Upgrade of the intercept program
Factors that Could Lead to a Downgrade
Underlying rating: Protracted timing to transition new leadership and board leading to fiscal instability, including insufficient cash flow to cover annual debt service; erosion of liquidity; substantial new debt absent rising reserves
Enhanced rating: Deterioration in credit quality of the intercept program; Significantly less debt service coverage by interceptable funds
The General Receipts Bonds are secured by a pledge of substantially all unrestricted revenue, including student tuition and fees, state appropriations, local and private grants and contracts, auxiliary enterprise revenues, indirect cost recoveries from research activity, sales and services of educational activities, investment income, and certain other revenue streams. FY 2016 pledged revenues of $506 million provided nearly 30 times coverage of the maximum annual debt service of $17 million. 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. UofL's General Receipts debt service payments are due twice a year (September and March). We are reasonably assured that sufficient nondistributed, 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 University of Louisville, this calculation results in a strong pro forma peak debt service coverage of over 5 times.
Use of Proceeds
Proceeds of the Series 2016D and 2016E will be used to finance expansion of the university's Papa John Cardinal Stadium; and pay costs of issuance. Proceeds of the Series 2016F bonds are expected to be used to refund the Louisville/Jefferson County Metro Government Mortgage Revenue Bonds, Series 2008A and 2008B, which were originally used for Papa John Stadium improvements and were guaranteed by the UofL Foundation; and to pay costs of issuance.
The University of Louisville is a comprehensive public research university, inclusive of medical and law schools, with three campus locations throughout metropolitan Louisville, Kentucky. In FY 2015, operating revenue totaled $933 million and for fall 2016 the university enrolled 18,816 full-time equivalent students.
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. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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.
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