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Rating Action:

Moody's assigns Aa1 and Aa2 to State University of Iowa's Series 2020 Refunding Revenue Bonds; outlook stable

27 Mar 2020

New York, March 27, 2020 -- Moody's Investors Service has assigned a Aa1 rating to State University of Iowa's $17.5 million Telecommunications Facilities Revenue Refunding Bonds, Series S.U.I. 2020 and a Aa2 to the $15.4 million Athletic Facilities Revenue Refunding Bonds, Series S.U.I. 2020 (Taxable). Moody's also affirms the outstanding Aa1 and Aa2 ratings, affecting $1.4 billion of bonds associated with the university under various security pledges, including the University of Iowa Facilities Corporation. This total does not include the rated debt for the separately secured University of Iowa Hospitals and Clinics (Aa2 stable).

RATINGS RATIONALE

The assignment and affirmation of the Aa1 ratings are based on SUI's exceptional strategic position as the state's flagship university, a member of the Big Ten athletic conference, and the only public academic medical center in the State of Iowa (Aaa stable). The rating also reflects SUI's strong spendable cash and investments inclusive of the University of Iowa Foundation, healthy operating cash flow margins, and manageable leverage. Also incorporated is an expanding patient care enterprise through University of Iowa Hospitals and Clinics (UIHC; Aa2 stable) with improving operations after a period of thinner performance. Primary credit challenges include high competition for new students, operating revenue reliance on potentially volatile UIHC performance, and thin liquidity relative to its Aa-rated peers. In addition, social risk is currently elevated due to the coronavirus pandemic.

The assignment of the Aa1 for the telecommunications system bonds further incorporates the strength of the pledged revenues, which include internal charges for the use of the system. The assignment and affirmation of the Aa2 on the Athletic Facilities Revenue Bonds rating reflects the university's fundamental strengths offset by a more limited security pledge that is subject to revenue volatility. Similarly, the affirmation of the university's other revenue bonds incorporates the strength of the individual pledged revenues and reserves.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. While SUI has significant flexibility to mitigate the financial impact of the pandemic, it will present operational challenges for both the university and academic medical center. The ultimate credit impact of this social risk will depend on the magnitude and duration of the outbreak. Consistent with most universities, SUI has transitioned to a full online curriculum for the remainder of the spring 2020 semester due to the novel coronavirus health crisis. While the financial implications of the outbreak are not fully known at this point, the university currently projects that the fiscal year will end consistent with budgeted projections due to strong results earlier in the year. SUI benefits from having a pre-existing, robust online program with infrastructure that supported the transition to online for students. The financial effects of the health crisis may be more pronounced in fiscal 2021 operating results depending on the impact on enrollment, state funding, and health care operations.

RATING OUTLOOK

The stable outlook reflects expectations of continued strong student demand, improving operating performance at UIHC, overall operating cash flow margin at around 12-13%, strong wealth levels and manageable future borrowing.

The rating and outlook reflect Moody's base case macroeconomic scenario, which includes a sharp contraction in growth in calendar 2020 followed by a rebound in calendar 2021. However, given the tremendous uncertainty, there is a range of plausible outcomes. The risks to our baseline forecasts remain firmly to the downside. For higher education, our current base case is that on campus classes will resume in the fall of 2020, and that multiple revenue streams will come under pressure in fiscal 2021, with some balance sheet deterioration due to investment losses.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Substantial and sustained increase in liquidity relative to debt and operations

- Significant and continual increase in operating cash flow

- Improved operating revenue diversity

- Material increase in student demand driving strong growth in net tuition revenue

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Greater than anticipated downside pressure associated with the health crisis, driving both heightened revenue pressures and a weakened balance sheet position

- Persistent deterioration of SUI's or UIHC's operating performance

- Substantial borrowing without corresponding growth in revenue or reserves

- For individual revenue pledges, deterioration of debt service coverage from pledged revenues

LEGAL SECURITY

Academic Building Revenue Bonds: no requirements

Academic Building Revenue bonds (ABR) are secured by a broad pledge of gross student tuition and charges, as well as other institutional income. The ABR bonds are also supported by a DSRF. SUI receives debt service reimbursement from the State for all ABR bonds, although the State has no legal obligation to provide this reimbursement and it is not pledged to bondholders

Athletic Facilities Revenue Bonds: 5.2x coverage, compared to 1.25x required

Athletic Facilities System Revenue Bonds are secured by the net revenues of athletic and recreational facilities, including a mandatory student fee; with a university covenant to annually budget fees and net revenues to maintain 1.25 times coverage of annual debt service; there is an additional bonds test of 125% MADS; and a DSRF

Dormitory Revenue Bonds: 1.8x coverage compared to 1.35x required

Dormitory Revenue bonds are secured by a pledge of net revenues of the residence system; the Board has covenanted to provide at least 1.35 times coverage of annual debt service; there is a DSRF

Iowa Memorial Union Revenue Bonds: 1.2x coverage compared to 1.2x required

The Memorial Union Revenue Bonds are secured by net revenues of the Memorial Union, including a mandatory student fee, and a DSRF; net revenues also include sales receipts and other University support; the board covenants to adjust fees in order to maintain 1.2 times coverage

Parking System Revenue Refunding Bonds: 2.2x coverage compared to 1.2x required

The Parking System Revenue Refunding Bonds are secured by a pledge of net revenues of the parking system and has a DSRF; the Board has covenanted to charge sufficient rates and fees to provide 1.2x of annual debt service coverage

Recreational Facilities Revenue Bonds: 2.9x coverage compared to 1.25x required

Recreational Facilities Revenue Bonds are secured by student fees net revenue of the Recreational Facilities System and has a DSRF; the Board has covenanted to charge sufficient rates and fees to provide 1.25x of annual debt service coverage

Telecommunication System Revenue Bonds: 2.4x coverage compared to 1.1x required

Telecommunications Facilities bonds are secured by a pledge of net revenues of the telecommunications system and any associated student fees; the Board has covenanted that it will adjust rates, charges, and fees for the use of the system to provide at least 1.1 times coverage of debt service; such adjustments can include a mid-year rate change if necessary; there is a DSRF

UIFC Revenue Bonds: not applicable, lease backed, no requirement

UIFC bonds are secured by lease payments made to UIFC from SUI from its general operating budget; there are ground leases between the Board of Regents and UIFC for the buildings and land, with the same termination dates as the facility leases; the leases are an absolute and unconditional obligation of the university, with no abatement; All but the Series UIFC Series 2019 bonds maintain a DSRF

Utility System Revenue Bonds: these bonds have been legally defeased and will be redeemed.

USE OF PROCEEDS

Proceeds from the bonds will current refund Series 2010 Athletic Facilities Revenue Bonds and Series 2009 Telecommunications Facilities Revenue Bonds.

PROFILE

State University of Iowa, located in Iowa City (Aaa stable), is the State of Iowa's flagship institution. The university serves a vital state health care role as Iowa's only academic medical center and is one of only three public universities in the state and a member of the Big Ten Academic Alliance. SUI offers a broad array of undergraduate and graduate degrees, including medicine, law, business, as well as a renowned Writer's Workshop program. The university reported fall 2019 enrollment with a headcount just over 32,500. The university's consolidated operating revenue is $3.8 billion, including University of Iowa Hospital and Clinics.

University of Iowa Facilities Corporation is a non-profit corporation organized for the benefit of University of Iowa Center for Advancement (the foundation) and the university, particularly through land and facilities acquisition and other means. The foundation is authorized under state laws to borrow money and, by resolution by the Executive Committee of its Board of Directors, to issue bonds on behalf of the Iowa Board of Regents for the benefit of SUI.

METHODOLOGY

The principal methodology used in these ratings was Higher Education published in May 2019. 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, 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.

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.

Ceridwynne Lake
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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