New York, March 03, 2021 -- Moody's Investors Service has assigned Aa2 ratings to Arizona State University's (AZ) (ASU) planned System Revenue Bonds (SRBs), which include approximately $67.4 million Taxable Series 2021A, $70.7 million Taxable Series 2021B and $134.8 million Tax-Exempt Series 2021C. All SRB series are fixed rate, maturing in 2043, 2053 and 2051, respectively. We have also assigned a Aa3 rating to ASU's planned approximately $39 million of SPEED Revenue Refunding Bonds (Stimulus Plan for Economic and Educational Development), Series 2021 (fixed rate, maturing in 2031). Both the SRBs and SPEED bonds will be issued by the Arizona Board of Regents (ABOR). Concurrently, we have affirmed the Aa2, Aa3 and Aa2/VMIG 1 ratings on approximately $1.9 billion of outstanding system revenue bonds, SPEED bonds, Certificates of Participation (COPs), lease-backed debt and the Series 2008A and 2008B Variable Rate Demand (VRD) SRBs backed by self-liquidity. The outlook is stable.
RATINGS RATIONALE
The assignment and affirmation of the Aa2 rating reflects ASU's demonstrated success and ongoing momentum for growth in enrollment, student charges and financial reserves. The university's growing brand recognition has favorably translated to solid donor support, rising net tuition revenue and growing sponsored research activity. A large and growing comprehensive multi-campus public university in the vibrant Phoenix and Maricopa County metropolitan area, ASU's excellent strategic position incorporates academic and program investments that have strengthened and diversified student demand. Solid fiscal oversight reflected in sound operating cash flow, disciplined capital investment and consistent reserve increases also supports the strategic positioning. These factors will provide ASU with sufficient runway to manage through near-term operating volatility associated with the coronavirus pandemic, which is a social risk under Moody's ESG framework due to implications for public health and safety. ASU remains challenged by weaker spendable cash and investments to operations and debt relative to peers, and ongoing capital needs. Modest operating and capital support from the State of Arizona (Aa1 stable issuer rating) results in higher reliance on student charges with increasingly price sensitive students limiting the pace of revenue growth and operating performance. In addition, ASU's growing reliance on online education for over one-third of headcount enrollment exposes it to volatility in the distance education market.
The assignment and affirmation of the Aa3 ratings on the SPEED bonds, one notch below the SRB rating, reflects the structure of the SPEED bonds, which include a subordinate lien on system revenues.
The affirmation of the Aa3 ratings on the COPs, also one notch below the SRBs rating, reflects the structure of the COP leases, which are subject to non-appropriation. The limit to a one notch differential for the COPs evidences the essentiality of the underlying projects to the university.
The affirmation of the Aa3 ratings on certain issues financed through the Arizona Capital Facilities Finance Corporation (ACFFC), one notch below the SRBs are based on the legal structure of the transactions, essentiality of the projects, and ASU's role in managing the projects and debt service payments.
The affirmation of the short term portion of the Aa2/VMIG 1 rating on the Series 2008A and 2008B VRD SRBs is based on the university's long-term rating, excellent treasury management and its own liquidity supporting the tender feature of the bonds. The university had $354 million of Moody's discounted daily liquidity as of December 31, 2020 which more than sufficiently covers the demand obligations.
RATING OUTLOOK
The stable outlook reflects expectations that Arizona State University will maintain sound operating performance and solid debt service coverage. The outlook also incorporates spendable cash and investments demonstrating measured growth relative to expenses and debt, with no decline in available liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
-Substantial improvement in financial resources relative to debt and operations
-Sustained healthy operating performance even as the university continues to invest in growth
-Sizable increase in research adding to revenue diversity and brand
-Short-term rating: Not applicable
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
-Borrowing plans well beyond those outlined by management
-Material and sustained weakening of operating performance and liquidity
-Short-term rating: Consistently weak coverage of the VRD SRBs from self-liquidity
LEGAL SECURITY
The system revenue bonds (pro forma $1.74 billion) are payable from and secured by a pledge of a first lien on gross revenues, which include tuition, fees and other revenue-producing facilities including auxiliary enterprises and indirect cost recovery. In fiscal 2020, gross revenues totaled $1.90 billion, which comprised 71% of the $2.7 billion of university total operating revenue. The system revenue bonds carry a rate covenant requiring the university to set fees such that gross revenues are at least 1.5x maximum annual debt service (MADS) of the SRBs. Gross revenues cover the estimated pro forma SRB gross MADS of $148 million by 12.9x.
Fifty percent (50%) of the debt service for the Series 2021A SRBs, in addition to 50% of the debt service on the outstanding Series 2019A and 2020A SRBS, will be paid through funding to ASU from a state capital infrastructure fund (CIF) legislatively established in fiscal 2017. Under the CIF program, in fiscal 2019 ASU began receiving $11.9 million of additional appropriations to be used for direct capital investment or for debt service on eligible financings. Appropriations from this program will increase each year at the lower of 2% or an inflation index. The program is funded through fiscal 2043. These appropriations are not pledged as additional security for the Series 2019A, 2020A or 2021A bonds.
The SPEED revenue bonds ($119 million at fiscal end 2020) are payable from and secured by a subordinate security interest in gross revenues of the university, with likely debt service support through transfers of certain available state lottery funds and university funds to a "SPEED Fund" held by the state treasurer.
USE OF PROCEEDS
Proceeds of the Series 2021A, 2021B and 2021C bonds will be used for: (1) identified capital projects, including a multipurpose arena and capitalized interest on the arena project, headquarters for the Thunderbird School of Global Management, phase three construction of the Interdisciplinary Science and Technology Building 7, a pedestrian bridge, various IT infrastructure updates, and renovation of certain labs and classrooms; (2) refunding of all or portions of the Series 2012A and 2013A bonds; (3) fund the July 1, 2021 principal and interest payments on all outstanding SRBs, excluding the Series 2008, 2019A and 2020A SRBs; and (4) pay costs of issuance.
Proceeds of the Series 2021 SPEED bonds will be used to refund all or portions of the Series 2010A and 2011 SPEED bonds, and to pay costs of issuance.
PROFILE
Arizona State University is a multi-campus, comprehensive public research university, located within the Phoenix metropolitan area, with additional locations in the Los Angeles, California area and Washington D.C. ASU recorded $2.67 billion in operating revenue in fiscal 2020 and for fall 2020 enrolled 117,006 full-time equivalent (FTE) students.
METHODOLOGY
The principal methodology used in the long-term ratings was Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020. The principal methodology used in the short-term ratings was Short-term Debt of US States, Municipalities and Nonprofits Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1210749. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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.
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Mary Cooney
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
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Dennis Gephardt
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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