New York, January 15, 2016 -- Issue: Revenue Refunding Bonds, Series 2016 (Facilities Refinancing Project); Rating: Aa2; Sale Amount: $58,490,000; Expected Sale Date: 01/20/2016; Rating Description: Revenue: Public University Broad Pledge
Summary Rating Rationale
Moody's Investors Service has assigned a Aa2 rating to Mississippi Institutions of Higher Learning's proposed total $58.5 million Revenue Refunding Bonds, Series 2016 (Facilities Refinancing Project) issued by Southern Mississippi Educational Building Corporation (SMEBC). The sale amount of the bonds could be reduced as the refunding is subject to market conditions. We have also affirmed the Aa2 ratings on Mississippi Institutions of Higher Learning's (IHL or the system) and University of Mississippi Medical Center's (UMMC) rated debt and the P-1 rating for Mississippi State University Educational Building Corporation's (MSU) commercial paper programs. The long-term rating outlook is stable.
IHL's Aa2 reflects the pledge of all legally available revenues to meet lease rental obligations funding debt service. The rating favorably incorporates strong system-wide student demand, moderate leverage, solid fundraising, favorable debt service coverage and ample balance sheet reserves. Challenges include patient care exposure with very high reliance on government payers, a substantial unfunded pension liability, ongoing campus capital needs and challenging research funding trends.
The P-1 rating for Mississippi State University's CP program when issued as extendable commercial paper reflects IHL's Aa2 and market access as a regular debt issuer. It also reflects IHL's pledged lease payments and liquidity to refund maturing commercial paper at the Extended Maturity Date in the event of a failed remarketing on the Original Maturity Date.
The stable outlook reflects expected continued good student demand, at least 8% cash flow generation, stable cash and investments and no significant reduction in state support. The UMMC bonds have a separate security and the rating or outlook could move separately from IHL. Although both currently Aa2 stable, the rating or outlook for each could move separately due to pressured operating performance and debt service coverage, liquidity or pledged revenues relative to outstanding debt and debt service.
Factors that Could Lead to an Upgrade
Significant growth in balance sheet reserves and liquidity exceeding medians for Aa2 peers
Consistently robust operating performance and cash flow
Stronger student demand evidenced by growing enrollment, particularly from non-resident students, and rising net tuition per student
Factors that Could Lead to a Downgrade
Material reduction in state support or increase in required state pension plan contributions
Consistently weaker operating cash flow below 8%
Debt increase beyond expectations resulting in deterioration of balance sheet cushion or debt service coverage
For UMMC a downgrade in IHL's rating or sustained deterioration in hospital operations
The ultimate debt service responsibility and driver for the Aa2 and P-1 ratings lies with the IHL Board of Trustees (the board), although the obligors are the various Educational Building Corporations for the system's member universities. Each university anticipates paying its debt service from Designated Revenues and Fund Balances. If a university's funds are insufficient, the board is obligated to make up any shortfall from legally available funds, including state appropriations for the eight public universities. IHL Board of Trustees possesses the requisite authority, willingness, and resources to ensure that timely debt payments are made.
The Series 2016 bonds are secured by SMEBC's lease payments from the Board of Trustees of State Institutions of Higher Learning of the State of Mississippi. IHL's lease obligation is on parity with its other leases supporting IHL bonds and MSU's Extendable Commercial Paper, all issued through the member universities' Educational Building Corporations. The board covenants that it will use appropriate designated revenues to make rental payments and any legally available funds. The revenue portion of Designated Revenues grew annually for the eight universities in FY 2015.
The board's lease agreements run for the life of the related bonds. The lease payments are sufficient to pay principal (whether at maturity or prior redemption or by acceleration or otherwise) and interest and are not subject to abatement. IHL pays the lease payments directly to the Trustee. The board's ability to assign its interest in the lease is highly limited and would require written consent of the Trustee.
The P-1 rating on MSU's ECP is based on issuance solely as extendable commercial paper, with total $50 million issuance as Series A Tax-Exempt or Series B Taxable. The ECP is issued for not more than 90 days as the Original Maturity Date and, if unsold on the Original Maturity Date, automatically extended to 270 days following original issuance. The extension or failure of MSUEBC to notify the Dealer and the Trustee of the extension is not an event of default. The ECP is not subject to redemption prior to its Original Maturity Date but can be redeemed in while at MSUEBC's option after the Original Maturity Date. MSU must obtain IHL board approval for permanent financing to refund the commercial paper.
Use of Proceeds
Proceeds of the bonds will be used to advance refund and defease the outstanding SMEBC Series 2009 bonds Revenue Bonds and Series 2009 Certificates of Participation, and pay issuance costs.
Founded in 1943 by amendment to the state constitution, the twelve-member Board of Trustees of the IHL oversees all of the state's eight public higher education institutions and University of Mississippi Medical Center.
The principal methodology used in this rating was Global Higher Education published in November 2015. An additional methodology used for the short-term rating was Rating Methodology for Municipal Bonds and Commercial Paper Supported by a Borrower's Self-Liquidity published in January 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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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Moody's assigns Aa2 to Mississippi Institutions of Higher Learning's Series 2016; outlook stable
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007