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Rating Action:

Moody's confirms Western Kentucky University's A2; outlook stable

Global Credit Research - 02 Oct 2017

New York, October 02, 2017 -- Summary Rating Rationale

Moody's Investors Service has confirmed Western Kentucky University's (WKU, KY) A2 rating on approximately $152 million of rated general receipts bonds. At the same time, Moody's confirmed the A3 rating on $13.7 million of outstanding lease revenue bonds for the Alumni Square Project issued by Warren County, Kentucky. The outlook is stable. This concludes the review for downgrade initiated July 21, 2017.

The A2 underlying rating and stable outlook reflects WKU's relatively sizeable scope of operations and steady net tuition revenue growth as a mid-sized comprehensive regional public institution serving central Kentucky. Very good strategic positioning acknowledges improved fiscal discipline and oversight to absorb near term state funding reductions from the Commonwealth of Kentucky (Aa3 stable issuer rating). The university derives almost a quarter of its revenue from the commonwealth. The rating is tempered by very high leverage inclusive of a significant pension liability and low liquidity, with limited ability to significantly grow financial reserves in light of competitive enrollment pressures.

The A3 rating on the County of Warren Series 2013 Lease Revenue Bonds (WKU Alumni Square Project) incorporates a subordinate unsecured general receipts pledge and non-cancelable lease structure with no abatement risk, as well as the more limited essentiality of the building to the university.

Moody's also maintains an A1 rating with a stable outlook on bonds issued with enhancement through the Kentucky Public University Intercept Program, which is based on the commonwealth's current rating and outlook, as well as state commitment, program history, program structure, sufficiency of interceptable revenues and transaction structure related to WKU's bonds.

Rating Outlook

The stable outlook over the next one to two years reflects our expectation that WKU will be able to absorb potential state funding reductions by continuing to translate its size and program diversity into near 10% operating cash flow margins. We also expect that financial covenants associated with debt issued at the Student Life Foundation will be annually exceeded. Beyond the current outlook period, heightened revenue or expense pressures may increasingly challenge credit quality.

Factors that Could Lead to an Upgrade

- Growing enrollment and net tuition revenue

- Sustained stronger operating performance

- Substantial deleveraging and growth in liquidity

Factors that Could Lead to a Downgrade

- Weaker operating performance

- Substantial increase in debt

- Reduction in already modest liquidity

Legal Security

The General Receipts Bonds are secured by a pledge of substantially all unrestricted revenue, including tuition and fees, gross state operating appropriations, unrestricted grants and contracts, sales and services of educational activities, and investment income.

Aggregate pledged revenues totaled $250 million in fiscal 2016 providing pro forma maximum annual debt service ($14 million) coverage of 18 times.

The university is also responsible for two series of debt that were issued on behalf of WKU by conduit issuers. The first are the fixed rate Series 2013 Lease Revenue Bonds issued by Warren County, Kentucky, for construction of an office building and parking garage and leased to the university. WKU has subleases in place for occupants of the building, with lease payments to the county payable a month prior to debt service payments.

The second debt obligation was issued on behalf of WKU by the City of Bowling Green, Kentucky (Aa2). Proceeds of the outstanding fixed rate Series 2010 general obligation and special revenue bonds supported construction of the university's Diddle Athletic Arena. The bonds are secured by both the G.O. unlimited tax pledge of the city of Bowling Green as well as special revenues derived from student athletic fees and arena suite rentals, which have historically been sufficient to cover the bonds. For fiscal 2016, fee revenue of $3.7 million was more than sufficient to cover maximum annual debt service of $2.9 million.

Debt held by the WKU Student Life Foundation and used solely for housing projects currently totals $108 million. During fiscal 2017, the SLF issued a combined $108 million in Series 2017A and 2017B bonds that were used to refinance the outstanding Series 2016 bonds, terminate three swaps, and provide an additional $33 million in proceeds used to construct a new 400-bed residence facility. The debt was privately placed with Regions Bank, is fixed rate, amortizing, and with a $45 million bullet payment in fiscal 2027. The debt is legally an obligation of the Student Life Foundation and there are no cross default provisions with the university's debt. There are multiple covenants in addition to a mortgage on Student Life Foundation assets. Covenants applicable to the SLF include: 1.20 times debt service coverage, 120 days cash on hand, and a separate debt service reserve fund of $4.1 million. Failure to adhere to certain covenants, including financial ratio covenants and a material adverse clause should there be a change in the SLF financial condition, would constitute an event of default, which would give the bank an option to declare the debt to be immediately due and payable. As of its most recent filing (June 30, 2017), the foundation was in compliance with all covenants.

Use of Proceeds

Not applicable.

Obligor Profile

Located in Bowling Green, Kentucky, Western Kentucky University was established as a normal school in 1907, before becoming a comprehensive four-year university in 1966. The university offers both undergraduate and graduate degrees, addressing the educational needs of the region through several branch campuses and online. In fiscal 2016, WKU recorded operating revenues of $315 million and for fall 2016 served an FTE enrollment of 16,922 students.

Methodology

The principal methodology used in the underlying rating was Global Higher Education published in November 2015. The additional methodology used in rating the Series 2013 lease revenue bonds was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. 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.

Mary Cooney
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

Edith Behr
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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