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Rating Action:

Moody's assigns Aa3 to South Dakota Board of Regents, SD's refunding bonds; outlook stable

24 Nov 2020

New York, November 24, 2020 -- Moody's Investors Service has assigned a Aa3 rating to South Dakota Board of Regents, SD's proposed $38.5 million Housing and Auxiliary Facilities System Refunding Revenue Bonds, Series 2021. We maintain the outstanding Aa3 ratings, which affects approximately $224.6 million of bonded debt. The outlook is stable.

RATINGS RATIONALE

South Dakota Board of Regents, SD (SDBOR) Aa3 rating incorporates its strong strategic positioning as the primary provider of higher education in the State of South Dakota (Aaa stable). The system, which includes six universities throughout the state, receives solid state support providing good revenue diversity on a large system revenue base. Further, the system provides centralized administrative functions and budgeting support for the universities, providing enhanced governance and management. Operating performance is solid with operating cash flow margins consistently around 20%. Despite state support for capital, leverage is moderate compared with similarly rated peers, though debt affordability is strong. Demographic challenges are increasing for the system as a whole, with a fall 2020 enrollment decline of nearly 3%.

Debt secured by housing and auxiliary revenue has a thin debt service coverage requirement, which weighs on credit quality. Housing occupancy remains robust despite enrollment declines, though pandemic conditions will prompt short-term de-densification with reduced occupancy. Historically, occupancy is above 90% for five of the six SDBOR universities. Despite reduced occupancy for Fall 2020, annual debt service coverage will materially exceed its 1.2x coverage covenant due to expense adjustments.

RATING OUTLOOK

The stable outlook reflects expectations that SDBOR will continue to generate strong cash flow and sound debt service coverage despite likely enrollment declines and resident system de-densification driven by the pandemic.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

-Substantial growth in unrestricted liquidity and flexible financial reserves

-Significant and sustained enrollment growth across the system

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

-Inability to maintain sound operating cash flow margins

-Debt service coverage that falls below 1.25x over multiple years

-Deterioration of state credit quality

LEGAL SECURITY

The Revenue Refunding Bonds, Series 2021 are on parity with all outstanding housing and auxiliary system revenue bonds.

Pledged revenue for the bonds consist of, in order of priority: (i) net revenue of the South Dakota State University (SDSU) institutional system; (ii) uncommitted funds of the Repair and Replacement Reserve Account of SDSU; (iii) net revenue of the other SDBOR institutions; (iv) uncommitted funds held in the reserves accounts of other SDBOR member universities; and (v) other funds which may be pledged or used as authorized by SDBOR under applicable law. There is no debt service reserve fund.

Each university within the system is required to notify the board at least 30 days before each interest or principal payment whether it has sufficient net pledged revenue available to make payments. If any university does not have sufficient net pledged revenue, then the board will secure payment by tapping the associated debt service reserve fund or use uncommitted funds held in the repair and replacement reserve accounts of the universities followed by other funds in the order outlined above. The executive director of the board has the authority and discretion to choose which component university's funds are used. To date, the board has not had to access other component university funds to make payments for another university's bonds.

Per the bond resolution, the board has covenanted to maintain a rate covenant of 1.2x debt service coverage from system net pledged revenue, with a consultant call-in if breached and a 1.0x floor. The board reports coverage of approximately 1.5x in fiscal 2019 and projects debt service coverage of at least 1.46x in fiscal 2020.

USE OF PROCEEDS

The series 2021 bond proceeds will refund the outstanding housing auxiliary revenue bonds, Series 2011 issued for the South Dakota State University residence facilities.

PROFILE

The South Dakota Board of Regents consists of the state's six public universities that provides education to nearly 24,600 full time equivalent students as of Fall 2020. The board's universities are managed through administrative officers of the board and the chief business officers of each component institution. The chief administrative officers at all the component institutions report to the board through the executive director and CEO and meet a minimum of six times per year.

METHODOLOGY

The principal methodology used in this rating 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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is 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.

Ceridwynne Lake
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

Dennis Gephardt
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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