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Rating Action:

Moody's affirms University of the Sacred Heart (PR)'s Ba3; outlook negative

12 Jul 2017

New York, July 12, 2017 -- Summary Rating Rationale

Moody's Investors Service has affirmed the Ba3 rating on University of the Sacred Heart's (Universidad del Sagrado Corazon or Sagrado) General Revenue and Refunding Bonds, 2012A issued through Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Pollution Control Facilities Financing Authority. The rating outlook is negative.

The affirmation of Sagrado's Ba3 rating reflects active fiscal management and financial oversight working to manage the university's expense structure against enrollment and revenue declines. Available liquidity provides some flexibility to manage through current challenges, Further, Sagrado is distinguished in its competitive domestic market as a large private Catholic university located in San Juan.

As offsetting considerations, the university confronts a highly challenging environment in its primary market, the Commonwealth of Puerto Rico (Caa3 negative). The university projects it will meet financial covenants related to its Series 2012A bonds for fiscal 2017, after failing to do so in both fiscal 2015 and 2016. However, Sagrado faces material market and operating pressures for the foreseeable future. Additionally, the university is appealing a decision by US Department of Education deeming Sagrado as not financially responsible, which would require the university to post a letter of credit to maintain eligibility to participate in the federal Title IV financial aid program.

Rating Outlook

The negative outlook reflects the likelihood of a rating downgrade if the university produces weaker than anticipated fiscal 2017 operating results or fails to achieve compliance on its financial covenants for the year, or should the university materially fail to meet its fall 2017 enrollment targets, continuing further operating pressures and liquidity usage.

Factors that Could Lead to an Upgrade

Stabilized student demand with growing net tuition per student and higher non-resident enrollment

Substantial growth in balance sheet resources and liquidity

Factors that Could Lead to a Downgrade

Department of Education denying appeal of calculation of composite score, requiring the posting of a letter of credit to continue to receive federal Title IV financial aid

Fall 2017 enrollment and fiscal 2017 operating results weaker than planned

Failure to achieve covenant compliance for fiscal 2017

Decline in unrestricted liquidity

Legal Security

The Series 2012A bonds are an unsecured general obligation of university. There is an additional bonds test and rate covenant. There is no debt service reserve fund.

The Loan Agreement for the bonds has two financial covenants, a Debt Service Coverage covenant of more than 110% and a Expendable Financial Resources to Debt covenant of more than 35%. Sagrado failed both covenants in fiscal 2015 and 2016 but estimates it will ample cushion for fiscal 2017 based on its preliminary results. The negative debt service coverage is largely attributable to pension adjustments and the charges related to its voluntary transition program for employee retirements included in the changes in unrestricted net assets and, consequently, in the debt service coverage calculation for the covenant. Moody's considers pension adjustments as non-operating expenses and, therefore, not included in our debt service coverage calculation, resulting in a positive debt service coverage number.

Due to failing to meet the financial covenants for two consecutive years, Sagrado retained a consultant for recommendations to review its business operations and pricing. As long as the university is taking all lawful actions to comply with the recommendations, the covenant failure is not an Event of Default. On June 23, Sagrado filed a notice on EMMA of the board's acceptance of 1) the consultant's report and 2) management expects the university to be in full compliance of the financial covenants as of June 30, 2017 (the fiscal year-end).

Use of Proceeds

None

Obligor Profile

Universidad del Sagrado Corazon (University of the Sacred Heart) is a large, private Catholic liberal arts university founded in 1880 by the religious order of the Society of the Sacred Heart. In 1970 the Sisters of the Sacred Heart transferred the governance to a lay Board of Trustees. Sagrado is located in the Santurce section of San Juan, a historic area. The university is largely undergraduate and offers selected masters and post-graduate certificates programs. Notable programs include those in the communications major, including digital media. Headcount enrollment for fall 2016 was over 4,900 students.

Methodology

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

Diane Viacava
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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