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08 Aug 2019
New York, August 08, 2019 -- Moody's Investors Service has assigned an A2 underlying and enhanced A1 rating to Eastern Kentucky University's (KY) (EKU) proposed $5 million General Receipts Refunding Bonds, 2019 Series A. We have also downgraded the underlying rating on the outstanding general receipts bonds to A2 from A1, affirmed the A1 enhanced rating on these bonds, and downgraded the rating on the Lease Revenue Bonds (Eastern Kentucky University Project), Series 2016 to A3 from A2. These actions affect approximately $172 million of rated debt. The outlook on Eastern Kentucky University has been revised to stable from negative.
The downgrade of the underlying general receipts bonds rating to A2 and lease revenue bond rating to A3 reflects the university's high financial leverage and thinning operating performance, which has weakened as annual support from the Commonwealth of Kentucky continues to decline. The university's market remains highly competitive as enrollment has softened by 5% since fall 2014, although favorably, EKU expects relatively flat enrollment in fall 2019. An enrollment decline in fall 2018 contributed to slightly weaker operating performance in fiscal 2019, although stabilizing enrollment and a tuition rate increase will contribute to an improvement in operating performance beginning in fiscal 2020. Improved operating performance will be needed to sustain growth in the university's available liquidity, which, when compared to peers, remains low on an absolute basis and relative to expenses. The university's growing net pension liability adds to its inflexible costs in the context of limited revenue growth prospects.
The A2 rating is supported by the university's sizeable scope of operations, with nearly $279 million in operating revenue in fiscal 2018. Additionally, although reserve growth has been limited due to recent capital and strategic investments, the university's total cash and investments of $123 million remains healthy relative to peers. Management's strategic responses to the various ongoing revenue and expense pressures including the development of new programs and distance learning strategy support the university's good strategic positioning.
The rating differential between the general receipts bonds and the lease revenue bonds reflect stronger security provisions for the general receipts bonds.
The A1 enhanced rating is based on the strength of the Kentucky Public University Intercept Program, which is based on the Commonwealth of Kentucky's current rating, as well as the sufficiency of interceptable revenues and transaction structure.
The revision of the outlook to stable reflects the significant capital and programmatic investments made by the university that are expected to yield relatively stable enrollment in fall 2019. The stable outlook also reflects the ability of the university to add to its unrestricted liquidity in fiscal 2019, and the expectation for improved operating performance beginning in fiscal 2020.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Growing student demand, driving sustained increases in enrollment and net tuition revenue
- Material growth in wealth and liquidity
- Sustained annual revenue growth, contributing to improved operating performance
- For enhanced rating, an upgrade of the Kentucky Public University Intercept Program
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Inability to sustain annual revenue growth, leading to further deterioration of operating performance and weaker debt service coverage
- Decrease in unrestricted liquidity
- Material additional debt without offsetting growth in revenue or reserves
- For enhanced rating, a downgrade of the Kentucky Public University Intercept Program rating
Eastern Kentucky University's general receipts bonds are secured by a pledge of general receipts, which is comprised of substantially all unrestricted revenue, including student tuition and fees, state appropriations, nongovernmental grants and contracts, auxiliary revenues, and investment income. Fiscal 2018 pledged revenue of roughly $245 million provided a healthy 15.4x coverage of the maximum annual debt service on a gross basis.
The A3 rating on the Phoenix IDA lease revenue bonds is based on the lease-backed structure under which debt service is payable by a third-party lessor (MACQ-Kentucky II, LLC, MACQ II), solely from the lease payments made by EKU. The one-notch differential to EKU's seniormost rating reflects the unsecured obligation for payment on the lease-backed bonds compared to the pledged revenue security of the general receipts bonds.
USE OF PROCEEDS
Proceeds from the General Receipts Refunding Bonds, 2019 Series A will be used to refund the university's outstanding General Receipts Bonds, 2009 Series A and to pay the cost of issuance.
Eastern Kentucky University (EKU) is a moderate-sized public university, with its main campus located in Richmond, Kentucky. In fiscal 2018, the EKU generated operating revenue of $279 million and enrolled 13,632 full-time equivalent (FTE) students as of fall 2018.
The principal methodology used in the underlying ratings was Higher Education published in May 2019. The principal methodology used in the enhanced ratings was State Aid Intercept Programs and Financings published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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