New York, September 01, 2016 -- Issue: Dormitory Revenue Bonds, Series S.U.I. 2016; Rating: Aa1; Rating Type: Underlying LT; Sale Amount: $34,450,000; Expected Sale Date: 09/08/2016; Rating Description: Revenue: Public University Broad Pledge
Issue: Utility System Revenue Refunding Bonds, Series S.U.I. 2016A; Rating: Aa1; Rating Type: Underlying LT; Sale Amount: $19,130,000; Expected Sale Date: 09/08/2016; Rating Description: Revenue: Public University Broad Pledge
Summary Rating Rationale
Moody's Investors Service has assigned Aa1 ratings to State University of Iowa's (SUI or University of Iowa) proposed $34.5 million of Dormitory Revenue Bonds, Series S.U.I. 2016 (final maturity in 2041), and $19.1 million of Utility System Revenue Refunding Bonds, Series S.U.I. 2016A (final maturity in 2029) to be issued through the Board of Regents, State of Iowa. The outlook is stable.
SUI's Aa1 rating reflects its solid market profile as the state's flagship university with nationally renowned programs, broad reach as a member of the Big Ten athletic conference, and the only public academic medical center in Iowa. The rating is also supported by the university's consistent positive operations, healthy financial resource cushion relative to debt and operations and a strong history of fundraising. These factors are counterbalanced by expanding patient care exposure, high reliance on extremely competitive federal research funding and a need for continued investment in facilities and equipment.
The stable outlook reflects expectations of strong student demand, favorable operations with cash flow maintaining at around 13%, strong wealth levels and manageable future borrowing.
Factors that Could Lead to an Upgrade
Significant, sustained increase in liquidity and financial cushion to debt and operations
Material increase in student demand driving strong growth in net tuition revenues
Factors that Could Lead to a Downgrade
Persistent deterioration of SUI's or University of Iowa Hospitals and Clinics' (UIHC) operating cash flow margins, leading to weak consolidated cash flow to cover debt service
Substantial borrowing without commensurate growth in revenue or reserves
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. FY 2015 coverage is 2.2 times, with future coverage projected at above 1.6 times.
Utility System bonds are secured by net revenues of the utility system, proceeds of any utility system student fees, and a debt service reserve fund. There is a rate covenant of 1.2 times annual debt service; FY 2015 coverage is 2.5 times with future coverage projected at above 2.0 times.
Debt service coverage on other pledges remains healthy as of June 30, 2015:
- Academic Building Revenue Bonds: 28 times coverage, no requirement
- Athletic Facilities System Revenue Bonds: 2.4 times coverage compared to 1.25 minimum
- Center for University Advancement Revenue Bonds: not applicable, lease backed, no requirement
- Iowa Memorial Union Revenue Bonds: 2.3 times coverage compared to 1.2 times required
- Parking System Revenue Bonds: 2.4 times coverage compared to 1.2 times required
- Recreational System Facilities Revenue Bonds: 1.6 times coverage compared to 1.25 times required
- Telecommunication System Revenue Bonds: 1.7 times coverage compared to 1.1 times required
- UIFC Revenue Bonds: not applicable, lease backed, no requirement
Use of Proceeds
Proceeds of the Dormitory Revenue Bonds, Series 2016 will be used to pay part of the costs of constructing and equipping a new residence hall for student housing and related facilities on the campus of the University, to fund a debt service reserve fund, and to pay the costs of issuing the bonds.
Proceeds of the Utility System Revenue Refunding Bonds, Series 2016A will be used to advance refund outstanding principal Utility System Revenue Bonds, Series 2007A, and to pay the costs of issuing the Bonds.
State University of Iowa is the State of Iowa's flagship institution located in Iowa City. The university serves a vital role in the health care of the state as the state's only academic medical center. It also serves an essential role as one of only three public universities in the state and offering medicine, law, business, a renowned Writer's Workshop program and many other programs. Enrollment is sizeable at about 28,000 full-time equivalents and operations are large at $3 billion and growing.
The principal methodology used in this rating was Global Higher Education published in November 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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 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.
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