University has $56.3 million of rated debt outstanding
New York, November 14, 2012 -- Moody's Investors Service has affirmed the Baa1 rating on Alabama
A&M University's (AAMU) $56.3 million of outstanding
Series 2007 Revenue Refunding and Capital Improvement Bonds. The
outlook is negative.
SUMMARY RATING RATIONALE
The Baa1 rating reflects a relatively weak student market position in
an increasingly competitive market, very low unrestricted liquidity
levels, a challenging state funding environment, weak fundraising,
and reduced transparency as a result of delayed audit release.
Theses credit challenges are offset by balanced operations despite state
funding reductions and enrollment declines, management team stabilization,
improved ability and willingness to provide current financial data,
coupled with improved financial controls, good coverage of debt
by pledged revenues, and currently moderate operating leverage.
The negative outlook reflects the university's significant capital
needs which could require a possible $80-$100 million
bond issuance in the next 12 to 18 months pending the completion of the
university's master facilities plan in October 2013. The
outlook also incorporates the university's 8 year trend of declining
enrollment.
CHALLENGES
*Highly competitive market and weakened student demand resulting with
a significant 16% decline in total full-time equivalent
enrollment from fall 2007 to fall 2012.
*Weak liquidity, with FY 2011 unrestricted monthly liquidity
of $6.7 million providing 22 days cash on hand. However
this is markedly improved from FY 2010 when the university reported just
$532,000 of unrestricted monthly liquidity. Management
has prioritized improving liquidity and has set a goal to develop a $10
million contingency fund.
*Significant capital needs including approximately $75 million
of deferred maintenance, and a new science building with auditorium
that the university is contemplating issuing $80 to $100
million of debt to address.
*The university is vulnerable to state budget challenges, with
31% of FY 2011 operating revenue from state appropriations.
While AAMU experienced mid-year proration in FYs 2009, 2010,
and 2011, the FY 2011 proration was just 3%, and the
university did not experience any proration in FY 2012.
*Relatively modest levels of philanthropic support, with gifts
to the foundation of just $1.3 million in FY 2011.
This was the first year the university's Trust for Educational Excellence
campaign no longer received state grants and matching funds as part of
a lawsuit agreement which concluded in FY2010, and have accounted
for over two-thirds of the annual gifts for the university for
the prior ten years.
STRENGTHS
*The university maintains status as Alabama's Land Grant designated
Historically Black Colleges and Universities. The university has
implemented changes at the admissions office as well as the advisement
and retention offices which are expected to help reach the university's
enrollment goal of 6,568 students.
*Positive operating performance in spite of state funding and enrollment
declines, with three-year (FYs 2009-2011) operating
margin of 1.9%, and FY 2011 operating cash flow margin
of 9.3%, stronger than prior year.
*Conservative debt structure with all debt in fixed rate mode with
decreasing debt service after reaching maximum annual debt service of
$5.6 million in FY 2013. The University Foundation's
outstanding $16.5 million of debt associated with privatized
student housing has been incorporated as direct debt in Moody's
calculations.
*Pledged revenues provide good debt service coverage of 6.26
times in FY 2011.
*Manageable operating leveraged balance sheet with direct debt to
operating revenue of 0.58 times.
Outlook
The negative outlook reflects the university's significant capital
needs which could require a possible $80-$100 million
bond issuance in the next 12 to 18 months pending the completion of the
university's master facilities plan in October 2013. The
outlook also incorporates the university's declining enrollment
and thin cushion of cash and investments.
WHAT COULD MAKE THE RATING GO UP
Unlikely given the negative outlook--significant increase
in financial resources and liquidity; improved market position;
markedly improved operating performance
WHAT COULD MAKE THE RATING GO DOWN
Additional debt issuance absent commensurate growth of financial resources
and revenue; continued deterioration of student demand; narrowing
of operating performance; declines in financial resources including
unrestricted cash
PRINCIPAL RATING METHODOLOGY
The principal methodology used in this rating was U.S. Not-for-Profit
Private and Public Higher Education published in August 2011. Please
see the Credit Policy page on www.moodys.com for a copy
of this methodology.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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
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Information sources used to prepare the credit rating are the following:
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Service's information.
Moody's considers the quality of information available on the rated entity,
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Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
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Please see ratings tab on the issuer/entity page on www.moodys.com
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the lead rating analyst and to the Moody's legal entity that has
issued the rating.
Caitlin Bertha
Associate Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Dennis M. Gephardt
Vice President - Senior Analyst
Public Finance Group
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 Alabama A&M University's Baa1 rating; outlook is negative
