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Rating Action:

Moody's assigns Baa2 rating to $23.4 million University of the Sacred Heart's (PR) General Revenue and Refunding Bonds, 2012A; outlook is stable

12 Nov 2012

University will have $23.4 million of rated debt outstanding following debt issuance

New York, November 12, 2012 -- Moody's Rating

Issue: General Revenue and Refunding Bonds, 2012A; Rating: Baa2; Sale Amount: $23,445,000; Expected Sale Date: 11-28-2012; Rating Description: Revenue: 501c3 Unsecured General Obligation

Opinion

Moody's Investors Service has assigned a Baa2 rating to University of the Sacred Heart's (PR) General Revenue and Refunding Bonds, 2012A to be issued through Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority. At the same time, we have affirmed the Baa2 rating on the Series 2001 bonds that are to be refunded with the current issue. The rating outlook is stable.

SUMMARY RATING RATIONALE:

The Baa2 rating reflects University of the Sacred Heart's (also known as Universidad del Sagrado Corazón or USC) established market position as a large private Catholic university in the Commonwealth of Puerto Rico and its consistently positive operating performance and cash flow generation, offset by modest but adequate financial resources and liquidity supporting debt and operations, as well as a highly competitive market and a student body with high reliance on federal student financial aid, particularly Pell Grants, that could be impacted by federal budget actions to reduce federal spending.

STRENGTHS

*Established student market position as a private Catholic liberal arts university located in San Juan, Puerto Rico, with an array of academic programs attracting over 5,600 full-time equivalent (FTE) students for the current fall 2012 semester, up from 4,836 FTEs in fall 2008. Net tuition per student has risen to over $6,200 for FY 2012 (based on fall 2011 enrollment), up from $5,690 in FY 2008, although essentially the same compared to FY 2011.

*Consistently favorable operating performance, as calculated by Moody's, with a 7.5% three-year average operating margin and an 18.8% operating cash flow margin for FY 2012. The operating performance has been consistently strong since FY 2010 following a slow improvement from FY 2007 when the university posted a 0.4% operating margin. This strong cash flow results in healthy debt service coverage of 4.1 times average debt service coverage for FY 2010-FY 2 012.

*Relatively modest leverage, with debt-to-revenues of 0.53 times for FY 2012 and expendable financial resources to pro-forma debt of 0.63 times, representing an adequate cushion.

*All fixed rate debt with no additional debt plans for the near-term.

CHALLENGES

*Thin financial resource cushion and liquidity. For FY 2012, total financial resources were only $19.5 million, although up from $9.1 million from FY 2010 due to retained surpluses. Expendable financial resources are only $14.7 million, but provide good 0.63 times coverage of debt. Monthly liquidity is thin at only $5.7 million for FY 2012 translating to only 55.5 days, although this is up from $2.5 million or 26.6 days for FY 2010.

*Highly competitive student market in Puerto Rico, which accounts for 93% of USC's incoming classes. USC competes largely with the Commonwealth's public university, University of Puerto Rico (rated Baa2/negative), the lowest cost provider in the Commonwealth providing high academic quality. USC also competes with other private institutions in Puerto Rico as well as on the mainland U.S.

*Very high reliance on federal Title IV student financial aid, particularly Pell Grants, due to the low average family income in Puerto Rico. About 70% of the students applying for financial aid receive Pell Grants, 56% of them for the maximum amount; another high source of financial aid are federal student loans. This high dependence makes USC vulnerable to federal funding pressures for financial aid programs, although the near-term impact is unknown. Also, the reliance on federal funding shapes USC's pricing strategy for affordability, constraining tuition revenue growth.

OUTLOOK

The stable outlook reflects expectations of continued favorable market demand, growth in net tuition revenues and continued positive operations and cash flow generation, with no near-term debt plans.

WHAT COULD MAKE THE RATING GO UP

Substantial growth in balance sheet resources and liquidity to better cushion debt and operations; strengthening of market position as demonstrated by increased net tuition per student, enrollment growth, higher matriculation, and lower dependence on federal funding

WHAT COULD MAKE THE RATING GO DOWN

Decline in financial resources or liquidity; weakening of student demand reflected in continued decline in enrollment and decline in net tuition per student; deterioration in operating performance resulting in operating losses and weak cash flow; additional debt issuance without commensurate growth in financial resources, or significant decline in federal financial aid without compensating revenues

PRINCIPAL RATING METHODOLOGY

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Diane F. Viacava
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Edith Behr
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Baa2 rating to $23.4 million University of the Sacred Heart's (PR) General Revenue and Refunding Bonds, 2012A; outlook is stable
No Related Data.
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