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Rating Action:

Moody's assigns A2 rating to Northern Arizona University's $40 million Refunding Certificates of Participation, Series 2013A; outlook is stable

Global Credit Research - 04 Jan 2013

Ratings affirmed on outstanding rated bonds and certificates of participation; University will have $469 million of rated debt including rated debt issued through university component units

New York, January 04, 2013 -- Moody's Rating

Issue: Refunding Certificates of Participation, Series 2013A; Rating: A2; Sale Amount: $40,000,000; Expected Sale Date: 1-29-2013; Rating Description: Revenue: Public University Broad Pledge

Opinion

Moody's Investors Service has assigned an A2 rating to Northern Arizona University's (NAU) estimated $40 million of Refunding Certificates of Participation, Series 2013A (COPs). We have also affirmed the A1 rating on the system revenue bonds, A2 rating on SPEED revenue bonds, and A2 ratings on other rated certificates of participation and lease revenue bonds. The outlook is stable.

SUMMARY RATING RATIONALE

The A1 rating assigned to NAU's system revenue bonds reflects NAU's large enrollment and revenue base and role as one of the three four-year public institutions in Arizona. Growth of enrollment and net tuition per student in recent years have helped offset cuts in state funding. Primary credit challenges include high leverage, weaker operating performance in FY 2012, and longer-term weaker capacity to grow student charges as a result of political and public resistance to past high tuition increases. The certificates of participation, lease revenue bond, and SPEED bond ratings are notched one off of the system revenue bonds due to a different, weaker legal security.

STRENGTHS

*Large public university with strong undergraduate enrollment growth over the past ten years (24,209 total full-time equivalent students in fall 2012), good demographic projections for high school graduates in Arizona, and healthy draw of out of state students (28% of total student body drawn from out of state);

*Strong growth in net tuition revenue and net tuition per student ($7,315 net tuition per student in FY 2012, up 30% over FY 2009) helping to offset cuts in state funding and the end of federal stimulus funding;

*Conservative debt structure, with all fixed-rate debt and no debt-related interest rate swap agreements;

*History of strong positive operating performance and cash flow, although FY 2012 expenses increased significantly and contributed to weaker operating performance in FY 2012 (2.4% operating margin in FY 2012, weaker than historical trends).

CHALLENGES

*Strong competition from a broad variety of other higher education institutions. Freshmen selectivity and matriculation at NAU have steadily weakened over the past few years with 76.5% freshmen selectivity in fall 2012 and a weak 16.4% yield on admitted freshmen students (the 2011 median for A1-rated public universities is a much higher 41.7% freshmen yield). Although total enrollment has grown over the past five years, graduate enrollment has declined significantly (headcount down 26% over the past five years) and been offset by growth in the undergraduate student population;

*State funding representing a much smaller proportion of operating revenue and delays in cash flow from the state. Although NAU expects FY 2013 state operating support to be relatively flat with FY 2012, state funding now represents 25% of operating revenue, down from 45% in FY 2008), requiring increased focus on expense containment and revenue diversification;

*High balance sheet and operating leverage as a result of significant capital investment and limited state capital support through direct capital appropriations. Expendable financial resources cover debt 0.5 times in FY 2012.

Outlook

The stable outlook reflects the university's growth of undergraduate enrollment and net tuition revenue to help offset past cuts in state funding. Although NAU has a strong history of positive operations and good cash flow, the university generated a markedly weaker operating margin in FY 2012. Ongoing focus on expense containment, operating efficiency and growth and diversification of private revenue streams will be critical credit factors underpinning the rating and outlook in the future.

WHAT COULD MAKE THE RATING GO UP

Significant growth of liquidity to support high debt level and growing expense base coupled with stronger student demand (selectivity and matriculation) and ongoing strong operating cash flow

WHAT COULD MAKE THE RATING GO DOWN

Weakening of student market position demonstrated by prolonged enrollment stagnation or declines leading to pressure on operating performance; increased debt without additional net revenue available to pay debt service; downgrade of the state or further significant pressure on state funding

Principal 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

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 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 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.

Please see the credit ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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.

Kimberly S. Tuby
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
60 State Street
Suite 700
Boston, MA 02109
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Mary Cooney
Asst Vice President - 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 assigns A2 rating to Northern Arizona University's $40 million Refunding Certificates of Participation, Series 2013A; outlook is stable
No Related Data.

 

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