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Rating Action:

Moody's downgrades Alabama A&M University's rating to Baa2 from Baa1; the outlook is stable

18 Dec 2012

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.

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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:
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SUBSCRIBERS: 212-553-1653

Moody's downgrades Alabama A&M University's rating to Baa2 from Baa1; the outlook is stable
No Related Data.
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