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Rating Action:

Moody's confirms University of the Sacred Heart, PR's Ba3; outlook negative

09 Jan 2018

$21 million rated debt

New York, January 09, 2018 -- Moody's Investors Service has confirmed the Ba3 rating on University of the Sacred Heart, PR's (Universidad del Sagrado Corazon or Sagrado) General Revenue and Refunding Bonds, 2012A issued through Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Pollution Control Facilities Financing Authority. The rating outlook is negative. This concludes the rating review initiated on October 20, 2017.

RATINGS RATIONALE

The confirmation of University of the Sacred Heart's Ba3 reflects a demonstrated ability to sustain near term enrollment following Hurricane Maria, along with modest expected use of reserves for recovery. Sagrado reported a return of 96% of originally enrolled students, resulting in minimal loss of net tuition revenue for the first half of fiscal 2018. The campus suffered comparatively minor damage and the university will receive funds from insurance and possibly FEMA to cover a portion of the costs.

The Ba3 rating favorably incorporates still adequate reserves with some enhanced flexibility due to the reclassification of certain funds previously considered permanently restricted. The university's strong management team has demonstrated a clear ability to control and adjust expenses to declining enrollment which should limit calls on cash to fund operations. However, for fiscal 2018 increased costs during recovery along with some reduction in revenue is expected to drive a modest reduction of liquidity. The rating is more fundamentally constrained by the university's very challenging market environment, with continued depopulation of Puerto Rico raising risks of ongoing enrollment declines and volatility. A small endowment, with modest fundraising and thin cash flow, limit its forward strategic position.

RATING OUTLOOK

The rating outlook is negative as the university works to stabilize operations and enrollment as Puerto Rico very slowly recovers from the hurricane's destruction. The current negative outlook reflects rating pressure if enrollment drops for spring 2018 or fall 2018 resulting in lower tuition revenues, or if fiscal 2018 operating results or liquidity are substantially weaker than fiscal 2017. Failure to achieve compliance on its financial covenants for fiscal 2018 could also pressure the rating. Prior factors driving a negative outlook, including the risk of heightened cash monitoring by the Department of Education, and certain covenant violations, were favorably resolved.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Stabilized student demand with growing net tuition per student and higher non-resident enrollment

- Substantial growth in balance sheet resources and liquidity

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Fall 2018 enrollment and fiscal 2018 operating results weaker than planned, with rising risks of longer term fiscal imbalance

- Failure to achieve covenant compliance for fiscal 2018 or beyond

- Material decline in unrestricted liquidity

LEGAL SECURITY

The Series 2012A bonds are an unsecured general obligation of university. There is an additional bonds test and rate covenant. There is no debt service reserve fund.

The Loan Agreement for the bonds has two financial covenants, a Debt Service Coverage covenant of more than 110% and an Expendable Financial Resources to Debt covenant of more than 35%. Sagrado reported full covenant compliance in fiscal 2017 of 388% and 65%, respectively. This follows failure of both covenants in fiscal 2015 and 2016. The failure was due to pension adjustments and charges related to its voluntary transition program for employee retirements, both reflected in the changes in unrestricted net assets and, consequently, in the debt service coverage calculation for the covenant. Moody's considers pension adjustments as non-operating expenses and, therefore, not included in our debt service coverage calculation, resulting in a positive debt service coverage number.

Due to failing to meet the financial covenants for 2015 and 2016, Sagrado retained a consultant to review its business operations and pricing and make recommendations for improved results. As long as the university was taking all lawful actions to comply with the recommendations, the covenant failure was not considered an Event of Default. On June 23, 2017, Sagrado filed disclosure on EMMA of the board's acceptance of the consultant's report and recommendations. As of June 30, 2017, Sagrado had regained full compliance with both financial covenants.

USE OF PROCEEDS

Not applicable

PROFILE

Universidad del Sagrado Corazon (University of the Sacred Heart) is a large, private Catholic liberal arts university founded in 1880 by the religious order of the Society of the Sacred Heart. In 1970 the Sisters of the Sacred Heart transferred the governance to a lay Board of Trustees. Sagrado is located in the Santurce section of San Juan, a historic area. The university is largely undergraduate and offers selected masters and post-graduate certificates programs. Notable programs include those in the communications major, including digital media. Headcount enrollment for fall 2017 was nearly 4,800 students.

METHODOLOGY

The principal methodology used in this rating was Higher Education published in December 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

Diane Viacava
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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