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Rating Action:

Moody's affirms Aa3, A1 & A2 Ratings for University System of Georgia; System outlook stable

31 May 2016

New York, May 31, 2016 -- Summary Rating Rationale

Moody's Investors Service has affirmed the Aa3 ratings on $10 million of the Board of Regents of the University System of Georgia's Revenue Refunding Bonds (OIIT Project), Series 2012, $896 million of the A1 ratings on 39 other series of lease revenue bonds, and $42 million of the A2 rating on Student Housing Facilities Revenue Bonds (Fort Valley State University Foundation Property, LLC Project), Series 2006 bonds. The outlook for the majority of related ratings including the outlook for the University System of Georgia (USG) is stable.

We have revised the outlook for $15 million South Georgia State College Revenue Bonds (SGC Real Estate Foundation, LLC Project), Series 2006 and $14 million Revenue Bonds (SGC Real Estate Foundation II, LLC Project), Series 2009 to negative from stable. The outlook revision reflects ongoing enrollment challenges, high financial leverage and weakening operating performance.

The ratings primarily reflect the strength of the University System of Georgia, its management and oversight of its component units, and the lease structure used for financing projects for each of its units as well as for the system itself. It also incorporates the wealth of the system with health reserves, and the underlying credit strength of the participating college and universities. USG is the dominant provider of public higher education in the Aaa-rated State of Georgia. The system's favorable tuition pricing, enrollment growth, and diverse revenue sources will continue to provide good cash flow and sound debt service coverage. While financial leverage for some colleges is high, overall financial leverage is manageable and USG future borrowing plans are limited.

Credit challenges include thin unrestricted liquidity relative to a large expense base, growing retirement benefit obligations, and ongoing capital needs. The ratings also incorporate the annual renewal and abatement risk associated with the lease obligation supporting the bonds. The Aa3 lease revenue rating for the system's office building benefits from the expansive system. The A1 lease revenue ratings reflect the relative essentiality of the financed assets at the various system members. The A2 rating associated with Fort Valley State University reflects the fundamental credit stress the university continues to face. This stress is largely mitigated by the system's strategic commitment and active oversight of each financing including those that encounter difficulty.

Rating Outlook

The stable outlook on the lease revenue bonds reflects the expectation that USG will service its Public Private Venture (PPV) debt without extraordinary support by the system. It also incorporates the expectation that USG will remain committed to overseeing and managing the PPV program while maintaining stable operations and sizeable financial reserves.

The negative outlook for the South Georgia State College reflects the college's ongoing enrollment declines, weakening operating performance and increasing likelihood that the system may have to provide financial assistance.

Factors that Could Lead to an Upgrade

Substantial increase in unrestricted liquidity and sustained improvement in operating performance

Material improvement in credit health of various participating colleges

Factors that Could Lead to a Downgrade

Any indication of a lack of willingness to renew rental agreements

Significant reduction in state support or erosion of unrestricted liquidity

Weakened financial performance including decline in debt service coverage

Legal Security

Security on the bonds is provided by rental revenue paid by the Board of Regents under the terms of annually renewable rental agreements on behalf of the various colleges and universities. The Board of Regent's obligation to make rental payments under the annually renewable rental agreements is an unsecured general obligation of the Board, payable from all unrestricted revenue sources. The lease revenue bonds are subject to appropriation and abatement risk.

In addition to assessing the relative essentiality of each financed project to the system, Moody's also considers the system's reliance on the PPV program that grew markedly over the 2002 to 2011 decade. With limited ability to enter into multi-year financial commitments, the system remains reliant on PPV financing. It currently has $3.2 billion of PPV related revenue bonds that predominantly support student life facilities on the various campuses. While the system has no legal obligation to renew any rental agreement, it has clear strategic interests in stewarding the PPV program. Our ratings incorporate the assumption that the system will continue to take extraordinary steps to renew rental agreements, including agreements for projects whose fundamental business conditions may be weak and require additional support from the system.

Use of Proceeds

Not applicable.

Obligor Profile

The University System of Georgia is an organizational unit of the State of Georgia. The USG includes 30 public colleges and universities and is the dominant provider of higher education in the state. Operating revenue totaled $7 billion in FY 2015 and, in the fall of 2015, the system enrolled over 280,000 full-time equivalent students.

Methodology

The principal methodology used in this rating was Global Higher Education published in November 2015. The additional methodology used 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.

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.

Dennis Gephardt
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

Diane Viacava
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 affirms Aa3, A1 & A2 Ratings for University System of Georgia; System outlook stable
No Related Data.
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