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Rating Action:

Moody's assigns Aa2 to University of Georgia's (GA) Series 2020 bonds; outlook stable

10 Nov 2020

New York, November 10, 2020 -- Moody's Investors Service has assigned a Aa2 rating to the University of Georgia's proposed $38.5 million Revenue Bonds (University of Georgia Project - UGAREF Central Precinct Housing Phase I, LLC), Series 2020. The bonds will be issued through the Athens Housing Authority, GA and will have a final maturity in 2052. Moody's has also affirmed the Aa2 ratings on approximately $226 million of outstanding debt at the UGA Real Estate Foundation issued on behalf of the University of Georgia. The outlook is stable.

RATINGS RATIONALE

The assignment of the Aa2 rating incorporates the University of Georgia's excellent strategic positioning demand as Georgia's flagship public university with strong student and broad geographic appeal. The comprehensive university generated operating revenue of $1.7 billion in fiscal 2019, up 6% from the prior year. The rating also acknowledges the university's low financial leverage with pro forma total debt of $385 million for the university and its component units at 0.2x operating revenue. Other strengths include healthy state funding despite near term headwinds from the Aaa-rated State of Georgia and close alignment with strategic priorities of the Board of Regents of the University System of Georgia, which governs the university. Prospects for ongoing growth of wealth aided by fundraising also support credit quality. These strengths are tempered by limited unrestricted liquidity, growing retirement benefit exposure and the fact that the lease revenue bonds are subject to renewal and abatement risk.

With budgetary discipline and steady enrollment and the ability to adjust operations to potential revenue fluctuations, UGA has considerable runway to manage through near-term operating volatility associated with the coronavirus pandemic. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The 10% decline in fiscal 2021 state funding was announced with time for strategic planning as the university adopted a breakeven budget. While much of the instruction in being delivered in a high flex, hybrid model, demand for the university's auxiliaries remains strong with student housing at 96% of capacity this fall.

During the final quarter of fiscal 2020, the Board of Regents of the University System of Georgia and UGA Real Estate Foundation agreed to amendments to several rental agreements which provide the primary source of debt repayment and legal security for the university's PPV projects on UGA's campus. The amendments deferred roughly $5 million of rental payments due in fiscal year 2020 until fiscal year 2022, bolstering the liquidity of the university as it planned for an uncertain academic year due to COVID-19. All regularly scheduled debt service payments of the UGA Real Estate Foundation were made and both parties acknowledged the need to meet ongoing contractual commitments. For most of the projects, the deferral functioned as a cash rebate during fiscal 2020 and interest free loan from the foundation to the university. During fiscal 2021 the university has the option to defer around $900,000 of rental payments related to the Revenue Refunding Bonds (UGAREF CCRC Building, LLC Project), Series 2011. The expenses including rental payments of the related research facility are supported by indirect cost recoveries that have faced limited pandemic disruption to date. If the university elects to defer that portion of its rental agreement payments in fiscal 2021, incremental debt service would be made via the liquidity of the UGA Real Estate Foundation. As of June 30, 2020, the foundation held $18.3 million of current cash and $6.4 million of noncurrent investments held at the primary UGA Foundation. The university's reliance on cooperative organizations to fulfill common treasury management tasks, such as providing noncurrent liquidity of $5 million, underscores how the highly conscribed ability to enter into multi-year commitments under the state constitution can complicate its institutional financing structure.

RATING OUTLOOK

The stable outlook reflects expectations that the University of Georgia will maintain sound operating performance and strong debt service coverage including the ability to respond to state funding reductions without interrupting its strategic momentum. The outlooks is also predicated on spendable cash and investments demonstrating measured growth relative to expenses and debt, with no decline in unrestricted liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Material growth of total cash and investments per student

- Substantial increase in unrestricted liquidity relative to operating expenses

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Significant deterioration in operating performance especially if combined with a reduction in unrestricted liquidity

- Material increase in financial leverage

- Any indication from the Board of Regents of the University System of Georgia of a lack of willingness to renew rental agreements supporting lease revenue or modification of leases in a way that impairs bondholder security

LEGAL SECURITY

All of the university's outstanding Public Private Venture (PPV) capital lease obligations, including the Series 2020 Central Precinct Housing Phase I bonds and existing UGA Real Estate Foundation bonds, are secured by rental revenue paid by the Board of Regents of the University System of Georgia under the terms of annually renewable rental agreements. Those bonds for UGA have been issued through the UGA Real Estate Foundation. The Board of Regents' obligation to make rental payments is an unsecured general obligation of the board, payable from all unrestricted revenue sources. The lease revenue bonds are subject to annual renewal and abatement risk.

In addition to assessing the relative essentiality of each financed project to the system, Moody's considers the system's reliance on the PPV program. It currently has over $3 billion of outstanding PPV-related lease revenue bonds that predominantly support student life facilities. While the system has no legal obligation to renew any rental agreement, it has clear strategic interests in stewarding the PPV program. Our ratings incorporate the assumption that the system will take extraordinary steps to renew rental agreements, including agreements for projects whose fundamental business conditions may be weak and require additional support.

USE OF PROCEEDS

Proceeds of the series 2020 bonds will used to fund a portion of a $50 million student housing facility. Proceeds will also fund a capitalized interest fund extended six months beyond expected completion and costs of issuance.

PROFILE

The University of Georgia is the flagship and land grant public university located in Athens, Georgia. The university had operating revenue of $1.7 billion in fiscal 2019 and enrollment of approximately 37,000 full-time equivalent students in fall 2020. UGA is a component of the University System of Georgia.

The UGA Real Estate Foundation was chartered in 1999. It manages and develops real estate assets on behalf of UGA. UGAREF operates under a cooperative organization agreement with the Board of Regents of the University System of Georgia. UGAREF is the sole member of the UGAREF Central Precinct Housing Phase I, LLC, which was created to aid the university in financing student housing assets on the UGA campus.

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.

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.

Dennis Gephardt
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.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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