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Rating Action:

Moody's assigns Aa2 to University of Arizona's (AZ) Series 2020A; outlook revised to negative

02 Oct 2020

New York, October 02, 2020 -- Moody's Investors Service has assigned an Aa2 rating to University of Arizona's proposed approximately $96 million System Revenue Refunding Bonds, Taxable Series 2020A to be issued by the Arizona Board of Regents. The fixed rate bonds have an expected final maturity in 2048. Moody's has also affirmed the Aa2 rating on $823 million of the university's outstanding system revenue bonds. We also affirm the Aa3 rating on about $534 million of rated outstanding SPEED (Stimulus Plan for Economic and Educational Development) bonds and Certificates of Participation (COPs). The outlook is revised to negative from stable.

RATINGS RATIONALE

The revision of the outlook to negative is driven by the university's thin operating performance and reduced liquidity, providing a more limited margin to adapt to a more challenging and volatile operating environment over the next several years. While budgeted figures for fiscal 2021 currently highlight an essentially balanced budget with increasing enrollment, liquidity is expected to contract marginally from already moderate levels compared to peers. Governance, a consideration under Moody's ESG framework, is a contributor to the negative outlook. This reflects management's tolerance for increased financial risk in the near term as the university is prioritizing aspects of an extensive and multi-faceted strategic plan intended to improve its longer term strategic position. Achievement of goals will be more difficult in the face of broader macro-economic headwinds.

Assignment and affirmation of the Aa2 rating incorporates University of Arizona's role as a flagship and land-grant institution, with sizeable enrollment, a significant over $2.1 billion scale of operations and total wealth of almost $2 billion. In addition, the university has an important position in the provision of medical education for the State of Arizona (Aa1, stable) and significant strength in its sponsored research profile. Debt levels are somewhat elevated compared to peers, in part mitigated by state support for a portion of debt service. An additional offsetting consideration is comparatively low revenue growth, which is likely to continue. With limited new funds, investment in strategic priorities over the next several years will be largely reliant on continuation of strong philanthropic trends.

The Aa3 ratings on the SPEED bonds, one notch below the System Revenue Bond (SRB) rating, reflects the structure of the SPEED bonds, which includes a subordinate lien on system revenues.

The Aa3 ratings on the COPs, also one notch below the SRB 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.

We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The fall 2020 semester will be on campus, and allow students to complete the semester from home following the Thanksgiving Day break. Overall enrollment appears to be increasing for fall 2020. Early indications are that operating performance in fiscal 2020 weakened, with some recovery in 2021 to break-even thanks to CARES funding and expense reductions.

RATING OUTLOOK

The negative outlook reflects the University's more limited ability to adjust to operating volatility over the next several years due to already modest operating performance and thinning liquidity. While the university continues to invest in multiple strategic objectives, its ability to return to stronger operating performance is uncertain.

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

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Sustained weakening of financial reserves, liquidity and leverage

- Further weakening of already thin operating performance, resulting in deterioration of debt service coverage

- Material reduction in state support

LEGAL SECURITY

The SRBs are payable from and secured by a pledge of and first lien on gross revenues, which include tuition, fees, and other revenue-producing activities, including auxiliary enterprises and indirect cost recovery. The SRBs carry a rate covenant requiring the university to set fees such that gross revenues are at least 2.0x maximum annual debt service (MADS) of the SRBs. There are no debt service reserve fund requirements.

The SPEED revenue bonds are payable from and secured by transfers of certain available state lottery funds and university funds to a "SPEED Fund" held by the state treasurer. The funds are further secured by a subordinate security interest in gross revenues of the university should lottery revenues and university funds be deficient. Lottery funds have been appropriated for debt service reimbursement funds since program inception.

Certificates of participation are secured by lease payments made by the board, as well as a security interest in the leased properties financed by each specific series of COPs. The leases are unconditional obligations of the board during any current fiscal year, payable from UArizona's operating budget but with no security interest in any revenue stream and subject to non-appropriation risk. The state legislature has consistently annually appropriated these debt service reimbursement funds since program inception.

USE OF PROCEEDS

Proceeds from the 2020A System Revenue Bonds ($95.8M) will be used to pay the interest due on outstanding bonds, except for the 2018B System Revenue Bonds, on December 1, 2020, partially refund the 2013A and 2013B System Revenue Bonds ($70M), and to pay cost of issuance.

PROFILE

The University of Arizona is the flagship and land-grant public higher education institution for the State of Arizona, as well as providing a significant healthcare presence. The main campus is located in Tucson, with an additional medical school and biomedical research campus located in Phoenix. In fiscal 2019, the university recorded Moody's adjusted operating revenue of $2.1 billion and in fall 2019 enrolled 44,713 full-time equivalent (FTE) students.

METHODOLOGY

The principal methodology used in these ratings was Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.

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.

Roy Eappen
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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