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Rating Action:

Moody's assigns initial A3 issuer rating to National University (CA) and A3 to System Management Group (CA) 2019 bonds; outlook stable

25 Jan 2019

New York, January 25, 2019 -- Moody's Investors Service has assigned an A3 issuer rating to National University, CA and A3 ratings to the proposed $182 million of Revenue Bonds (National University) Series 2019A (Tax-Exempt) and Revenue Bonds (National University) Series 2019B (Taxable). The final maturity of the bonds will be in 2049. The bonds will be issued through the California Municipal Finance Authority and will be an obligation of System Management Group, CA (SMG) additionally secured by a guaranty from National University, CA (NU). The outlook on National University is stable.

RATINGS RATIONALE

The A3 rating on the bonds reflects National University's absolute and unconditional guaranty on the bonds, with appropriate structural provisions to ensure timely payment to bondholders and a covenant limiting asset transfers out of NU. The rating also incorporates the acquisition of Northcentral University which adds considerable scale to the National University System (NUS), pushing its pro forma revenue base to over $420 million as a diversified provider of higher education programs with an emphasis on adult and degree completing programs including online learning. The system's flagship National University, as guarantor of the proposed debt, brings significant credit strength through its unrestricted capital reserves of approximately $700 million. The borrower, System Management Group, brings operational expertise gained from providing various services to system members. While profitability of units across the system varies, the combined system exhibits sound operating performance, especially in light of a manageable debt burden and absence of additional borrowing plans. In addition, National University has considerable marketable real estate with a market value much higher than then the book value and ability to reduce to its administrative space without impacting the student experience.

Credit challenges include highly limited revenue diversity with around 90% reliance on student charges and related dependence on federal financial aid programs. Competition for students in many programs will likely intensify as National University System members face competition from

private not-for-profit, public and private for-profit universities. Limited brand recognition will hinder the system's ability to compete for students and achieve enrollment growth even as marketing budgets may increase. In addition, the system's structure adds operational complexity. This complexity will be compounded by the formation of National Education Partners which holds the legacy non-academic assets and liabilities of the prior Northcentral University.

RATING OUTLOOK

The stable outlook reflects expectations that National University and SMG will successfully integrate the operations of Northcentral University as a part of the system. The outlook is also predicated on maintenance of sound operating performance at the NU and system level as well. The maintenance of healthy financial reserves including unrestricted liquidity as well as manageable financial leverage also support the stable outlook.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Substantial and sustained increase in total cash and investments including unrestricted liquidity

- Enhanced revenue diversity

- Ongoing strengthening of student market positioning

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Deterioration of operating performance

- Material decline in financial resources

- Marked increase in financial leverage

LEGAL SECURITY

The Series 2019A and 2019B bonds are secured by National University's guaranty. National University's obligations under the Guaranty Agreement are absolute and unconditional, and cannot be discharged, released, abated or set-off in any way. Payments under the Loan Agreement are required to be made by SMG at least 10 business days prior to each debt service payment date. If the trustee has not received the payment in full within two days after the funds are required, the trustee demands payment from National University due within three business days.

The Guaranty Agreement limits the ability of National University to transfer Unrestricted Cash and Investments to its affiliates through a financial covenant. For any fiscal year in which its Unrestricted Cash and Investments to Total Debt Ratio is less than 1.5x, it shall not transfer in excess of five percent of its Unrestricted Cash and Investments to one or more of its affiliates. The limit on transfers excludes some transaction types including loans to affiliates made in the normal course of business, market price transfers of goods or services, and transfers to SMG.

USE OF PROCEEDS

SMG will use the proceeds to finance or refinance the acquisition of Northcentral University, a formerly for-profit, online university, and to pay for costs of issuance. At closing the academic assets and operations of Northcentral were donated to Westmed College a non-profit component of the National University System. The non-academic assets and liabilities acquired from Northcentral will be held by National Education Partners, an online program manager owned by SMG.

PROFILE

System Management Group (SMG) is a component of National University System, created in 2017 as a tax-exempt organization to provide services to system affiliates. National University formed the National University System comprised of independent organizations with almost entirely overlapping boards. National University is the largest by both enrollment and financial resources within the system. The other members of the system include System Management Group (SMG), National University Virtual High School, Northcentral University, City University of Seattle and John F. Kennedy University.

National University is a private, nonprofit university founded in California in 1971. The university had operating revenue of $268 million in fiscal 2018 and enrolled approximately 18,000 full-time equivalent students in the fall of 2018. The university offers 120 undergraduate and graduate degree programs primarily online but also has 16 campuses in California, one in Nevada.

METHODOLOGY

The principal methodology used in the revenue ratings was Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts published in May 2017. The principal methodology used in the issuer rating was Higher Education published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.
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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