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Announcement:

Moody's affirms Alabama A&M University's Baa1 rating; outlook is negative

14 Nov 2012

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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service's information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

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 considers to be reliable including, when appropriate, independent third-party sources.

However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

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
No Related Data.
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