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Rating Action:

Moody's affirms Northern Arizona University's (AZ) A1 and A2 ratings; outlook stable

25 Jul 2019

New York, July 25, 2019 -- Moody's Investors Service has affirmed the A1 ratings on Northern Arizona University's (AZ) (NAU) system revenue bonds, in addition to the A2 ratings on NAU's outstanding Certificates of Participation (COPs), lease revenue bonds, and SPEED (Stimulus Plan for Economic and Educational Development) bonds. We currently rate approximately $460 million of outstanding debt. The outlook is stable.

RATINGS RATIONALE

The university's A1 system revenue bond rating reflects NAU's established presence as a large comprehensive university in northern Arizona, with its main campus in the City of Flagstaff, and a sizable $538 million scope of operations. Favorably, NAU recorded strong growth in enrollment, net tuition revenue, and cash and investments over the fiscal 2014-18 period, outpacing rated peers. Additional strengths include sound cash and investments relative to expenses, and liquidity of a solid 154 monthly days cash on hand. The A1 rating also incorporates historic, uninterrupted State of Arizona support for 26% of debt obligations.

Offsetting credit challenges incorporate NAU's very high leverage relative to both cash and investments and cash flow, as well as a high pension liability, and limited prospects for significant improvement in the near term. Rising competitive student market pressure, demonstrated by elevated financial aid needs, led to weak growth in net tuition revenue in fiscal 2018 and likely for 2019. NAU's operating cash flow margins have been decreasing over the last decade, with the fiscal 2018 margin of 11.2% providing a low 1.3x debt service coverage relative to rated peers. Our analysis also incorporates NAU's agreements with third parties for strategic on-campus housing projects.

The A2 rating on the COPs, lease revenue bonds and SPEED (Stimulus Plan for Economic and Educational Development) bonds, one notch below the System Revenue Bond (SRB) rating, reflects the structures of the COP leases and lease revenue bonds, which are subject to non-appropriation and the SPEED bonds, which are subordinate to the SRBs. The limit to a one notch differential evidences the essentiality of the underlying projects to the university.

RATING OUTLOOK

The stable outlook reflects our expectation that NAU's operating cash flow margins will improve to the 12%-14% range and annual debt service coverage will provide more than sufficient coverage of debt service obligations, while maintaining steady liquidity beyond what is expected to be used in fiscal 2019.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Substantial increase of financial resources and liquidity with limited increase in debt

- Meaningful improvement in cash flow, with surplus contributions to build flexible reserves

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Sustained deterioration of operating performance and less than sufficient debt service coverage

- Additional sizeable debt issuance without meaningful offset in financial resources

- Failure of the state to support State-funded debt service

LEGAL SECURITY

As of fiscal end 2018, NAU's debt totaled $603 million and was comprised of system revenue bonds, Certificates of Participation (COPs), SPEED (Stimulus Plan for Economic and Educational Development) bonds, lease revenue bonds, and various capital leases. With fiscal 2019 amortizations, total outstanding debt is $582 million at June 30, 2019.

The seniormost system revenue bonds ($331 million at fiscal 2018, $321 million at fiscal 2019) are payable from and secured by a pledge of and first lien on gross revenues, which include tuition, fees, and other revenue-producing activities, including auxiliary enterprises and indirect cost recovery. In fiscal 2018, gross revenues totaled $356 million, which comprised 66% of the $538 million of university operating revenue. The SRBs carry a rate covenant requiring the university to set fees such that gross revenues are at least 2.0x maximum annual debt service (MADS) of the SRBs. Gross revenues cover the SRB gross MADS of $27.8 million by 12.8x.

The SPEED bonds (fiscal 2018 $132 million, fiscal 2019 $126 million) are payable from and secured by a subordinate security interest in gross revenues of the university, with likely debt service support through transfers of certain available state lottery funds and university funds to a "SPEED Fund" held by the state treasurer.

The COPS (fiscal 2018 $50 million, fiscal 2019 $46 million) are secured by lease payments, as well as a security interest in the leased properties financed by each specific series of COPs. The leases are unconditional obligations, payable from NAU's operating budget but with no security interest in any revenue stream. The obligation to pay lease payments is absolute and unconditional, but subject to non-appropriation or non-allocation for any succeeding fiscal year as a result of not having budgeted or allocated available funds. The state legislature has consistently annually appropriated these debt service reimbursement funds since program inception.

Three series of lease revenue bonds (fiscal 2018 $76 million, fiscal 2019 $73 million) are secured by separate lease agreements between ABOR acting on behalf of NAU and a special purpose limited liability corporation established by Northern Arizona Capital Facilities Finance Corporation (NACFFC). NAU will annually appropriate for lease payments from unrestricted revenues.

PROFILE

Northern Arizona University is a comprehensive, public four-year university, with its main campus located in Flagstaff, over 20 satellite locations around the state, and an established online program. In fiscal 2018, the university recorded Moody's adjusted operating revenues of $538 million and in fall 2018 enrolled 29,383 full-time equivalent (FTE) students.

METHODOLOGY

The principal methodology used in these ratings was Higher Education published in May 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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 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.

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.

Mary Cooney
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Susan Fitzgerald
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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