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Rating Action:

Moody's assigns A3 to Sacred Heart University's (CT) proposed Series L revenue bonds; outlook stable

16 Mar 2022

New York, March 16, 2022 -- Moody's Investors Service has assigned an A3 to Sacred Heart University's (CT) proposed $100 million of Revenue Bonds, Sacred Heart University Issue, Series L. The bonds will be issued through the Connecticut Health and Educational Facilities Authority and have an expected final maturity in fiscal 2053. Moody's has also affirmed the A3 issuer and outstanding revenue bond ratings. The outlook is stable. The university has pro forma debt of about $422 million.

RATINGS RATIONALE

The affirmation of Sacred Heart University's (SHU) A3 issuer rating is supported by its very good brand and strategic positioning, consistently excellent operating performance, and solid liquidity. Prudent financial management and planning will help maintain above 2x debt service coverage even after incorporating the added $100 million of new debt from the Series L bond issuance. However, the proposed debt will further weaken an already elevated debt burden relative to wealth, scale and operations. Prospects for sustaining strong financial operations are enhanced by the economies of scale provided by a substantial $314 million revenue base as well as a relatively flexible expense structure. Further, a combination of high demand academic program offerings, updated facilities, and focus on the student experience will help sustain favorable student demand and steady revenue growth despite ongoing competitive and demographic headwinds. Nominal wealth and financial reserve coverage of expenses remain modest relative to peer competitors, but unrestricted liquidity will continue to provide coverage of above 365 days of expenses despite some planned spend down on capital priorities.

The assignment and affirmation of the A3 on the university's revenue bonds reflects the general obligation characteristics of the pledge without material benefit of additional collateral or security.

RATING OUTLOOK

The stable outlook reflects Moody's expectations of maintenance of excellent operating performance providing sufficient cash flow to support at least 2x debt service coverage. It also reflects our expectations of continued strong liquidity and gradual improvement in leverage relative to wealth and scale.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Growth in wealth vastly outpacing peer competitors and substantially strengthening coverage of adjusted debt and expenses

- Further improvement to brand and strategic position, reflected by student market expansion, along with growth in student and donor generated revenue

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Erosion in student demand leading to a downturn in operating performance and a move to below 2x debt service coverage

- Inability to gradually improve total cash and investments to adjusted debt and debt to revenue metrics beyond fiscal 2023

LEGAL SECURITY

All bonds are unconditional general obligations of the university with a secured interest in tuition receipts until the payoff or maturity of the Series I & J bonds. There is also a negative pledge on the core campus.

SHU will maintain ample headroom above the two financial covenants included in the bonds' security package. Under the covenants, the university is required to maintain at least 1.25x debt service coverage and 0.5x total cash and investments to debt. A breach of either covenant would not constitute an event of default or be grounds for debt acceleration. Rather, the university could be required to retain the services of a consultant to work to restore covenant compliance. As calculated under the indenture, the university recorded debt service coverage at 4.04x and total cash and investments to debt at 1.0x for fiscal 2021.

USE OF PROCEEDS

Proceeds from the proposed Series L bonds will be used to finance a portion of the costs associated with constructing two new student residence halls that will add 480 new beds, expanding the Center for Healthcare Education, and improving various other campus facilities.

PROFILE

Sacred Heart University is a sizeable private university in the Catholic intellectual tradition located in Fairfield, Connecticut. It offers diverse programs at the undergraduate, graduate and doctoral levels, as well as professional certificate programs. The university is organized into six colleges: arts and sciences, business and technology, health professions, nursing, education and human development, and St. Vincent's College. For fall 2021, the university served just under 10,000 headcount students and has a revenue base of $314 million.

METHODOLOGY

The principal methodology used in these ratings was Higher Education Methodology published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1257002. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

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.

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

Ferdinand Perrault
Additional Contact
Housing
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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

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