System has $4.7 billion of rated debt outstanding including commercial paper issuance at fully authorized $200 million
New York, July 27, 2012 --
Moody's Rating
Issue: Systemwide Revenue Bonds, Series 2012A; Rating:
Aa2; Sale Amount: $348,000,000; Expected
Sale Date: 8-1-2012; Rating Description:
Revenue: Public University Broad Pledge
Issue: Systemwide Revenue Bonds, Series 2012B (Taxable);
Rating: Aa2; Sale Amount: $17,000,000;
Expected Sale Date: 8-1-2012; Rating Description:
Revenue: Public University Broad Pledge
Opinion
Moody's has assigned a Aa2 rating to California State University's $365
million of Systemwide Revenue Bonds, Series 2012A and 2012B (Taxable).
The rating outlook is stable. At the same time, we have affirmed
the existing ratings of California State University's outstanding rated
long-term debt.
SUMMARY RATINGS RATIONALE:
The Aa2 rating for California State University (the "trustees",
the "system" or "the CSU") reflects its exceptional market position and
student demand as the nation's single largest four-year higher
education system and its ability to weather substantial state funding
reductions through implementation of significant tuition increases and
launching initiatives for expense reductions. Offsetting the strengths
are continued material reliance on state appropriations from A1-rated
State of California to fund operations and moderately high balance sheet
leverage relative to comparably rated large systems or universities.
The Aa3 rating for the lease revenue bonds issued by the State Public
Works Board for the benefit of the system incorporates both the strength
of the system's pledge to make rental payments and the historical practice
of the State of California including funds for payment in its annual budget.
For both the CSU and the state, this funding mechanism is an important
financing structure, which should lead to appropriate support of
any individual lease. Therefore we rate these obligations one notch
below that of the system's strongest and broadest bond pledge (Aa2 for
the Systemwide Revenue Bonds) as the lease structure of these transactions
is weaker than other bonds of the CSU rated Aa2. Further,
Moody's believes the state's involvement in these transactions and its
history of including funds for payment of debt service in its budget add
an additional degree of credit strength.
STRENGTHS:
*Key credit strength of exceptional student demand driven by the system's
23 campuses located throughout the state, as well as its established
access mission, with enrollment of over 360,000 full-time
equivalent (FTE) students for fall 2011.
*Declining reliance on state funding driven by rising student-related
revenues to offset reduced state funding, with state funding declining
to 37% for fiscal year (FY) 2011 from 45% in FY 2008 and
revenues from student charges rising to 37% from 32% over
the same time period, as calculated by Moody's, with the trend
projected to continue for the recent FY 2012 and current FY 2013.
*Good financial resources, with $3.71 billion
of total financial resources for FY 2011 and unrestricted monthly liquidity
of $2.73 billion, with both projected to be consistent
or better for FY 2012.
*Strong financial and budget oversight producing good operating cash
flow to manage through substantial state funding cuts, including
implementing fee increases, enrollment caps and expense management
initiatives.
*Active system central governance and oversight, coupled with
increased operating independence, including a centralized debt management
function and capital needs assessment, ability to retain and invest
its student fee revenues and autonomy in setting tuition and fees.
CHALLENGES:
*Deep cuts in state funding potentially totaling $1.04
billion or 37% from FY 2008 to the current FY 2013 if the "trigger"
for a $250 million cut occurs in January 2013, while CSU
maintains continued significant reliance on funding from the State of
California (rated A1, stable outlook) to fund system operations
and capital funding for academic facilities; state appropriations
represented 37% of FY 2011 revenues derived from state operating
funding, although projected to be lower for FY 2012.
*Pending management change with the recently announced retirement
of the system's chancellor, with a planned departure when the new
chancellor is selected. Although a national search is underway,
the pool of candidates qualified to run a public university system of
CSU's scale is limited, particularly when dealing with the operational
and funding challenges the system faces.
*Rising leverage from debt issuance, with expendable resources
to pro-forma debt (including full commercial paper issuance of
$200 million) of 0.6 times and pro-forma debt-to-revenues
of 0.68 times.
*Expected ongoing debt issuance to fund continuing capital needs for
both academic and auxiliary facilities that requires continued strong
growth in pledged revenues to support rising debt service.
OUTLOOK
The stable outlook for The California State University is based on our
expectations of continued exceptional student demand, financial
performance producing favorable cash flow providing ample debt service
coverage and ability to manage through reductions in state support for
the system.
WHAT COULD MAKE THE RATING GO UP
Continued growth in financial resources and sustained improvement in philanthropic
support; consistently positive operating performance and strong operating
cash flow; ability to continue to grow net tuition revenues with
no negative impact on student demand.
WHAT COULD MAKE THE RATING GO DOWN
Decline in liquidity from continued state funding cuts or payment deferrals;
inability to increase student tuition and fee revenues or implement further
expense control initiatives to offset state funding cuts that result in
weakened operating cash flow and debt service coverage, as well
as a weakened student market position; downgrade of State of California
G.O. rating; additional borrowing without compensating
resource and revenue growth
PRINCIPAL RATING 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
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service's information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a rating is of sufficient quality and from sources Moody's
considers to be reliable including, when appropriate, independent
third-party sources.
However, Moody's is not an auditor and cannot in every instance
independently verify or validate information received in the rating process.
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.
Diane F. Viacava
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Dennis M. Gephardt
Vice President - Senior 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 Aa2 rating to California State University's $365 million of Systemwide Revenue Bonds, Series 2012A and 2012B (Taxable); outlook is stable
