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Rating Action:

Moody's assigns A1 rating to North Carolina Agricultural and Technical State University's $10.2 million of General Revenue Bonds, Series 2013; outlook is stable

18 Nov 2012

University will have $69.6 million of pro-forma debt

New York, November 18, 2012 -- Moody's Rating

Issue: General Revenue Bonds, Series 2013; Rating: A1; Sale Amount: $10,200,000; Expected Sale Date: 12/5/12; Rating Description: Revenue: Public University Broad Pledge

Opinion

Moody's Investors Service has assigned an A1 rating to North Carolina Agricultural and Technical State University's (NCAT) General Revenue Bonds, Series 2013 issued through the Board of Governors of the University of North Carolina System. The rating outlook is stable. The university is a member of the University of North Carolina System and is located in Greensboro, North Carolina.

SUMMARY RATING RATIONALE

The A1 rating reflects the university's healthy market position as the largest publicly funded historically black college in North Carolina with a science and engineering focus, improved financial stewardship, limited debt and history of state operating and capital support. Challenges include significant future borrowing plans to improve student life facilities and $18 million of demand debt at an affiliated foundation used to finance student housing improvements.

STRENGTHS

*Clearly defined role as historically black engineering and science land grant university within the UNC System with full time equivalent (FTE) enrollment of almost 10,000 students. NCAT is one of the nation's leading producers of African-American engineering graduates and the School of Engineering is able to attract students from many states, especially along the east coast of the US. Net tuition per student ($4,182 in FY 2011) benefits from close to 20% of non-resident students paying higher tuition rates.

*With total Moody's adjusted operating revenue of $269 million according to preliminary FY 2012 data, NCAT benefits from its large enrollment base and sponsored research program. While state operating support comprised 38% of operating revenue in FY 2011, grant and contracts were 36% and tuition and auxiliary revenue was 24%.

*Good resource coverage of debt due to limited debt issuance to date; expendable resources of $45 million in FY 2011 cushion pro-forma debt of $69.6 million by 0.7 times.

*History of capital support from the state. Between 2000 and 2009 the state invested $163 million in the university's campus through 21 various projects that have advanced the state of the classroom and other academic facilities.

*Generally balanced operating performance with three year average margin of -0.9% as calculated by Moody's, supporting average debt service coverage of 3.6 times. We expect debt service coverage will decrease as the debt service on the Series 2011 and 2012 bonds begin in FY 2013.

CHALLENGES

*While operating leverage is manageable now with pro forma debt to operating revenues of 0.26 times, management plans to invest in student life facilities that could increase debt by about $90 million beginning in 2014; multi-year pro-forma debt of $159 million represents 0.61 times of FY 2011 revenues.

*Near term debt plans will substantially lower financial resource coverage (expendable financial resource coverage would drop to 0.45 times with $90 million of planned additional debt).

*Declining flexible reserves due to capital investment; in FY 2011, the university's monthly liquidity of $37 million equated to just 59 monthly days cash on hand.

*Demand debt related to foundation financed student housing introduces credit risk, though risk is mitigated by adequate monthly liquidity coverage of demand debt (184.6% in FY 2011) and improved occupancy rates and debt service coverage of the on-campus project.

Outlook

The stable outlook reflects the student market strength of the university, its capital and operating support from the Aaa-rated state and is based on expectation of healthy cash flow in support of debt service, and the assumed maintenance of unrestricted resource levels to boost the available funds pledge on bonds. It incorporates future borrowing plans that will increase operating leverage to a still manageable level.

WHAT COULD MAKE THE RATING GO UP

Ongoing growth in financial resource base coupled with limited increases in debt; further improvements in scope of research activities and student market position; solid improvement in operating cash flow to support future debt service.

WHAT COULD MAKE THE RATING GO DOWN

Significant reductions in state support for operations; deterioration of student market position; decline in unrestricted resources leading to weaker available fund balance; substantial reduction in debt service coverage.

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.

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Asst Vice President - Analyst
Public Finance Group
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
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Dennis M. Gephardt
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Releasing Office:
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Moody's assigns A1 rating to North Carolina Agricultural and Technical State University's $10.2 million of General Revenue Bonds, Series 2013; outlook is stable
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