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Rating Action:

Moody's changes outlook on Western Kentucky University to negative; assigns Aa3 enhanced and A1 underlying to 2013 Series A General Receipts; enhanced outlook also negative

08 Oct 2013

$164.6 M pro-forma rated General Receipts affected

New York, October 08, 2013 --

Moody's Rating

Issue: Western Kentucky University General Receipts Bonds, 2013 Series A; Underlying Rating: A1; Enhanced Rating: Aa3; Sale Amount: $36,630,000; Expected Sale Date: 10/15/2013; Rating Description: Revenue: Public University Broad Pledge

Opinion

Moody's Investors Service has assigned a Aa3 enhanced rating and A1 underlying rating to Western Kentucky University's (WKU) $36.63 million 2013 Series A General Receipts bonds. At this time, Moody's has also affirmed its ratings on outstanding General Receipts bonds. WKU's underlying rating outlook has been revised to negative from stable reflecting elevated balance sheet and operating leverage, weakening cash flow, and expectations for more narrow debt service coverage given additional debt in the form of capital leases and bonds. The Aa3 enhanced rating is based on the structure and mechanics of the Kentucky University Intercept Program and the negative outlook is based on the Commonwealth of Kentucky's current outlook.

SUMMARY RATING RATIONALE

The A1 underlying rating reflects Western Kentucky University's stable market position as one of the largest public universities in the Commonwealth of Kentucky offering a comprehensive array of academic programs, and healthy net tuition growth. The rating and negative outlook also incorporate ongoing weakening of cash flow and debt service coverage that is expected to narrow further given the current borrowing and new capital leases; relatively low coverage of debt by expendable financial resources; budget pressures at the commonwealth; and a competitive student market.

The Aa3 enhanced rating and negative outlook are based on the structure and mechanics of the Kentucky Public University Intercept Program, and the Commonwealth of Kentucky's current Aa2 rating and negative outlook. For more information on the Kentucky Public University Intercept Program, please refer to Moody's report dated April 4, 2011.

Moody's also maintains Aa3/VMIG1 ratings on WKU's Student Life Foundation debt Series 2000 and Series 2008 issued through the County of Warren, KY (Aa2) based on letters of credit with J.P. Morgan Chase Bank, N.A. (Aa3/P-1). In addition, Moody's maintains Aa2 ratings on the City of Bowling Green's General Obligation and Special Revenue Bonds, Series 2010 and 2011, which are secured by both the G.O. unlimited tax pledge of the City of Bowling Green (Aa2 tax-backed) as well as special revenues derived from WKU.

CHALLENGES

*Ongoing decline in cash flow and debt service coverage, with a 9.4% cash flow margin for FY 2013. Cash flow is expected to improve slightly, but remain narrow for FY 2014. Debt service coverage was 1.9 times in FY 2013, and is expected to narrow given additional debt service for capital leases and bonds.

*WKU is leveraged from a balance sheet and operating perspective, particularly given the current 27% increase in pro-forma debt. Expendable financial resources in FY 2013 provide 0.34 times coverage of pro-forma debt, less than half the 0.73 times median coverage for A1-rated publics in FY 2012.

*Budget pressures at the Commonwealth of Kentucky (Aa2 negative) have resulted in decreasing state appropriations for WKU. State appropriations declined nearly 10% since FY 2010 to $72.7 million in FY 2013, but remained flat in FY 2014.

*The commonwealth is currently grappling with its pension funding and higher contribution requirements stemming from recent pension reform, which will likely result in an increased pension expense burden or a reduction in state funding for operations for plan participants such as WKU.

*WKU Student Life Foundation's $74 million of outstanding debt, which Moody's treats as direct debt of the university, employs a letter of credit that adds credit risk of unexpected claims on liquidity. As of FYE 2013, the university's monthly liquidity covered demand debt 107%, below the FY 2012 median of 198% for A1-rated public universities. In addition, the foundation had approximately $12.8 million of unrestricted cash and marketable securities at 3/31/2013.

STRENGTHS

*WKU has a solid market position as evidenced by a strong yield of 43% for fall 2012. The university is one of Kentucky's largest public universities offering a comprehensive array of undergraduate and graduate programs. Full-time equivalent (FTE) enrollment was 16,877 in fall 2012, and is expected to be flat for fall 2013.

*Net tuition per student continues to grow at a healthy pace, at 6% in FY 2013 and 5.6% in FY 2012, which helped offset state appropriation cuts. Management expects continued growth in net tuition per student due to increasing recruitment of out-of-state and international students who generally pay higher net tuition.

*WKU's expendable financial resources are healthy for the rating category, at $110 million in FY 2013 (including net assets of affiliated foundations), providing financial flexibility and satisfactory coverage of operations at 0.37 times.

Outlook

The outlook for Western Kentucky University's A1 underlying rating is negative reflecting our expectation of continued weak cash flow and pressure on debt service coverage particularly given oncoming additional debt service for bonds and capital leases and potential requirement for increased pension contributions beginning in FY 2015.

The Aa3 rating for the enhanced rating is expected to move in conjunction with the commonwealth's own credit strength. The commonwealth's current long-term rating outlook is negative.

WHAT COULD MOVE THE RATING DOWN

Western Kentucky University's Underlying Rating: Downgrade could result from continued weak cash flow and deterioration of the university's debt service coverage or lower liquidity. Rating pressure could also result from further weakening of expendable financial resources coverage of debt, through either financial resource erosion or additional leverage.

Kentucky Public University Intercept: Deterioration of the credit quality of the Commonwealth of Kentucky's issuer rating; weakening of debt service coverage from interceptable funds

WHAT COULD MOVE THE RATING UP

Western Kentucky University's Underlying Rating: Upward rating pressure is unlikely at this time given WKU's negative outlook, but return to a stable outlook could result if the university improved its cash flow performance leading to improved and sustained debt service coverage, enhanced expendable financial resource coverage of debt and steady enrollment.

Kentucky Public University Intercept: Improvement in the credit quality of the Commonwealth of Kentucky's issuer rating

The principal methodology used in the underlying rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Default published in July 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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.

Emily Schwarz
Asst Vice President - Analyst
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

Mary Cooney
Asst Vice President - Analyst
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 changes outlook on Western Kentucky University to negative; assigns Aa3 enhanced and A1 underlying to 2013 Series A General Receipts; enhanced outlook also negative
No Related Data.
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