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Rating Action:

Moody's assigns Aa2 to California State University's (CA) Series 2018 Systemwide Revenue Bonds; outlook stable

29 Jun 2018

New York, June 29, 2018 -- Moody's Investors Service has assigned a Aa2 to the California State University's (The CSU) $514 million Systemwide Revenue Bonds, Series 2018A (maturing 2050) and $155 million Systemwide Revenue Bonds, Series 2018B (Taxable) (maturing 2050) to be issued by the Trustees of the California State University. We have also affirmed the Aa2 on outstanding Systemwide Revenue Bonds and Aa3 on outstanding Lease Revenue Bonds. The outlook is stable.

RATINGS RATIONALE

The Aa2 rating for The CSU's Systemwide Revenue Bonds (SRBs) reflects the system's scale as the nation's single largest four-year higher education system, exceptionally strong student demand, solid unrestricted liquidity and operations and improved state funding from the State of California. The rating also favorably incorporates The CSU leadership's effective operational management as it implements key strategies for student success, including its Graduation Initiative 2025 to raise graduation rates above national averages. Offsetting challenges are high leverage relative to comparably rated large systems or universities with continued significant debt expected to fund ongoing capital needs, relative modest fundraising relative to other Aa2-rated peers, continued material reliance on state funding, and substantial post-retirement liabilities and related expenses impacting operations.

The system expects another year of enrollment growth for fall 2018, but has announced no tuition increase for fiscal 2019. The CSU expects comparable to better operating results for fiscal 2018 ending June 30 from higher state funding and some increase in net tuition per student driven by a tuition increase in fall 2017. The approved fiscal 2019 state budget provides a nearly $200 million increase in base appropriations, $127 million of one-time funding for programmatic initiatives that will offset the revenue impact from the tuition freeze, and $35 million of one-time funding for deferred maintenance. Liquidity is projected to be at least comparable to higher for the June 30, 2018 fiscal year-end.

The Aa3 rating for the Lease Revenue Bonds issued by the California State Public Works Board for the benefit of The CSU reflects the bonds lease structure and abatement risk.

RATING OUTLOOK

The stable outlook reflects expectations of continued exceptional student demand, well-managed operations producing at least stable cash flow and good debt service coverage, and maintenance of ample unrestricted liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Substantial growth of balance sheet reserves and unrestricted liquidity resulting in a stronger cushion supporting debt

- Consistently stronger operations with greater revenue diversification, including gift revenues, producing more robust cash flow

- Greater autonomy from state mandates (such as tuition setting), boosting operating flexibility

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Significant additional debt issuance within the next two to three years without higher cash flow

- Sustained liquidity decline

- Consistently weaker cash flow with inability to stem expense growth

LEGAL SECURITY

The SRBs (Aa2) are issued under a system-wide debt financing program with pledged revenue including gross revenue from various auxiliary and mandatory student fees. Total pledged revenue was $4.9 billion for fiscal 2017, including Tuition Fees (the basic enrollment charge paid by all CSU students) of $3.1 billion in Gross Revenues effective fiscal 2016. There will be approximately $6.4 billion of Systemwide Revenue Bonds outstanding following the current issuance. The CSU has covenanted to not issue senior lien debt. There is a sum-sufficient rate covenant and no debt service reserve fund.

The Lease Revenue Bonds' Aa3 (issued by the State Public Works Board, $155 million outstanding) is based on the strength of The CSU's legal obligation to make rental payments from "first lawfully available funds". Effective fiscal 2015, the state revised its funding methodology to add $297 million, an amount that includes debt service for the Lease Revenue Bonds, to The CSU's annual base appropriation.

USE OF PROCEEDS

Proceeds of the Series 2018 SRBs will provide funding for revenue generating capital projects at system campuses, refund certain outstanding SRBs, refinance outstanding commercial paper, and pay issuance costs.

PROFILE

With nearly 483,000 headcount enrollment, The CSU reports it is the largest single four-year university system in the nation. The CSU has 23 campuses and eight off-campus centers spanning the entire state. The system's campuses provide a broad array of undergraduate and an increasing number of graduate programs. The California State University was created by the Donahoe Higher Education Act of 1960, which reorganized higher education in California.

METHODOLOGY

The principal methodology used in these ratings was Higher Education published in December 2017. 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 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.

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.

Diane Viacava
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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