Rating action affects $56.3 million of rated debt
New York, December 18, 2012 -- Moody's Investors Service has downgraded Alabama A&M University's
(AAMU) Series 2007 Revenue Refunding and Capital Improvement Bonds to
Baa2 from Baa1. The rating action affects $56.3 million
of rated debt. The outlook is stable.
SUMMARY RATING RATIONALE
The downgrade reflects recent developments since our last affirmation
on November 14, 2012, involving elevated risks associated
with the university and affiliated foundation's governance and management
as well as increased risk for acceleration of student housing debt of
the foundation. The Alabama A&M University Foundation's
board has been noncompliant with its bylaws, primarily not meeting
as frequently as prescribed and meeting without a quorum. The lack
of board engagement and oversight diminishes the foundation's fiscal
stewardship of approximately $43 million of investments,
which represent 77% of Moody's calculation of university
financial resources. In addition, the Foundation LLC's
Series 2000 bonds, used to finance 15% student housing on
AAMU's main campus, has breached technical covenants which
would enable bondholders to accelerate the debt -- $16.5
million compared to $13.2 million of expendable financial
resources.
The Baa2 rating and stable outlook incorporate the university's
relatively weak student market position with declining enrollment,
very low unrestricted liquidity, challenging state funding environment,
significant capital plans dependent on limited fundraising or debt,
and the potential for recent complaints against the university foundation
to garner attention from its regional accreditor, possibly leading
to an inquiry or a sanction. Theses credit challenges are offset
by balanced operations despite state funding reductions and enrollment
declines, management team stabilization, improved ability
and willingness to provide current financial data, good coverage
of debt by pledged revenues, and currently moderate operating leverage.
The stable outlook also incorporates state oversight, which is demonstrated
in recent state legislation altering the nomination process for Board
of Trustee members.
CHALLENGES
*Foundation board has been noncompliant with its bylaws, including
not meeting as frequently as prescribed and meeting without a quorum,
diminishing its ability to provide oversight and stewardship to the foundation's
endowment. The foundation's $43 million of net assets
(FY 2011), comprise 77% of the Moody's calculated total
financial resources of the university.
*Foundation LLC that financed student housing on the university's
campus remains in technical Events of Default as of July 24, 2012.
May 2012 payments were sufficient to make basic rental payments and satisfy
the balance requirement for the debt service reserve fund. However,
several Events of Default remain uncured. Pursuant to the Indenture,
the Bond Insurer (ACA) is entitled to direct the Trustee to accelerate
the debt. The LLC has had uncured Events of Default for several
years and the insurer has not chosen to accelerate the debt.
*Weak liquidity, with FY 2011 unrestricted monthly liquidity
of $6.7 million providing 22 days cash on hand. This
is inflated relative to most of Moody's portfolio as AAMU has an
September 30 reporting date when most of fall tuition payments have been
received, as opposed to a June 30 reporting date which is often
a thinner cash month of the year for universities. However this
is markedly improved from FY 2010 when the university reported just $532,000
of unrestricted monthly liquidity. Management has prioritized improving
liquidity and has set a goal to develop a $10 million contingency
fund.
*University is involved with litigation with the research institute
and the previous research institute director, and the university
has failed to disburse a grant by US Agency for International Development
within the originally specified timeframe. While the university
was granted an extension to December 31, 2012 to disburse the funds,
these events indicate management oversight and grant compliance that falls
below best practice standards.
*Significant capital needs including approximately $75 million
of deferred maintenance, and a $30 million new science building
with auditorium that the university hopes to fund through fundraising.
*University is vulnerable to state budget challenges, with 31%
of FY 2011 operating revenue from state appropriations. While AAMU
experienced mid-year proration in FYs 2009, 2010, and
2011, the FY 2011 proration was just 3%, and the university
did not experience any proration in FY 2012.
*Highly competitive market and weakened student demand resulting with
a significant 16% decline in total full-time equivalent
enrollment from fall 2007 to fall 2012.
*Relatively modest levels of philanthropic support, with gifts
to the foundation of just $1.3 million in FY 2011.
This was the first year the university's Trust for Educational Excellence
campaign no longer received state grants and matching funds as part of
funding from a federal decree which concluded in FY2010, and have
accounted for over two-thirds of the annual gifts for the university
for the prior ten years.
STRENGTHS
*The university maintains status as Alabama's Land Grant designated
Historically Black Colleges and Universities. Additionally,
the university has implemented changes at the admissions office as well
as the advisement and retention offices which are expected to help reach
the university's enrollment goal of 6,568 students.
*Positive operating performance in spite of state funding and enrollment
declines, with three-year (FYs 2009-2011) operating
margin of 1.9%, and FY 2011 operating cash flow margin
of 9.3%, stronger than prior year.
*Conservative debt structure with all debt in fixed rate mode with
decreasing debt service after reaching maximum annual debt service of
$5.6 million in FY 2013.
*Currently manageable operating leverage, with direct debt to
operating revenue of 0.58 times.
Outlook
The stable outlook incorporates the university's current governance
and management initiatives, balanced operations despite state funding
reductions and enrollment declines, management team stabilization,
improved ability and willingness to provide current financial data,
good coverage of debt by pledged revenues, and no near-term
borrowing plans. The stable outlook also incorporates state oversight,
which is exemplified in recent state legislation altering the nomination
process for Board of Trustee members to more in line with best practices.
WHAT COULD MAKE THE RATING GO UP
Significant increase in financial resources and liquidity; renegotiation
of Series 2000 bond covenants to eliminate acceleration risk; reorganization
of Foundation Board of Directors with demonstrated adherence to bylaws
and improved financial stewardship; and at least stable enrollment
WHAT COULD MAKE THE RATING GO DOWN
Accreditation sanction by SACs; acceleration of Foundation LLC's
debt; additional debt issuance absent commensurate growth of financial
resources and revenue; continued deterioration of student demand;
deterioration of liquidity or financial reserves
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.
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.
Please see the credit ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
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the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Caitlin Bertha
Associate 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
Dennis M. Gephardt
Vice President - Senior 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 downgrades Alabama A&M University's rating to Baa2 from Baa1; the outlook is stable
