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Rating Action:

Moody's downgrades Alabama State University to Ba1 from Baa1; outlook negative

Global Credit Research - 03 Jul 2014

$230M rated debt

New York, July 03, 2014 -- Moody's Investors Service has downgraded Alabama State University's (ASU) general tuition and fee revenue bond rating to Ba1 from Baa1, and downgraded the Series 2005 lease revenue bonds to Ba2 from Baa2. The outlook is negative.

SUMMARY RATING RATIONALE

The downgrade to Ba1 reflects the continued weakening financial condition of the university evidenced by declining liquidity, extremely high operating leverage and inability to cover debt service for a multi-year period. Ongoing weak operating performance required a draw on reserves to cover debt service in 2014 and this is expected to continue through at least 2015, if not longer, resulting in weakening liquidity. A history of weak governance and expense control reduces the prospects that the university will be able to rapidly and strategically restore operating equilibrium.

This downgrade also incorporates the Southern Association of Colleges and Schools Commission on Colleges (SACSCOC) June 19, 2014 placement of ASU's accreditation status on Warning. SACSCOC determined significant non-compliance in six areas: governing board, board conflict of interest, financial stability, control of finances, control of sponsored research/external funds, and Title IV program responsibilities.

The Ba1 rating is supported by Alabama State University's market niche as a medium-sized public historically black university (HBCU) in Montgomery, with diverse program offerings and recent enrollment growth. The Ba2 rating on the Series 2005 lease revenue bonds, rated one level below the university's highest rating, incorporates the essentiality of the project (power plant) and the risk associated with the lease-backed security for the bonds issued by the Public Educational Building Authority of Montgomery on behalf of Alabama State University.

The negative outlook reflects the possibility of additional credit deterioration should liquidity erode further, the university prove unable to improve operating performance, or by failure to address the SACSCOC Warnings in a timely manner. Reliance on an operating line of credit to manage through delayed state funding and a swap liability could create additional demands on liquidity.

CHALLENGES

*ASU has had significant governance and management challenges, which have led to and been exacerbated by extraordinary events, such as a forensic audit, presidential turnover, and accreditation challenges that limit ability to focus on core operational improvement.

*Management's inability or unwillingness to significantly address a growing structural deficit are symptoms of weak controls that will lead to continued financial deterioration absent material and timely corrective action.

*Operating performance has markedly deteriorated as expense growth dramatically outpaced revenue growth over the last three fiscal years (FY 2011-13). Expenses grew a combined 9.4% over this time frame compared to just 0.5% growth in revenue.

*Weak cash flow has required the university to draw on reserves to pay debt service costs and contributed to declining liquidity. The FY 2013 operating margin was -9.1%, with the operating cash flow margin of 7.1% providing 0.55 times debt service coverage and FY 2014 is expected to be similarly weak based on year-to-date projections.

*ASU remains extremely leveraged, with the $235 million of direct debt for FY 2013 to operating revenues of 1.9 times and expendable financial resources covering debt a narrow 0.17 times. This limits flexibility to respond to current challenges.

*Cash and investments have declined substantially due to operating deficits. Monthly days cash on hand was a very weak 64 days at September 30, 2013 and is expected to deteriorate further in FY 2014. The university is highly reliant on a $7 million operating line throughout the year.

STRENGTHS

*The executive branch of the state has become more involved with the governance of the university in the last year, and the governor has begun to regularly attend university board meetings. This has strengthened the university's relationship with the state. Appropriations provided 35% of operating revenue in fiscal 2013.

*ASU serves an established and recognized role in Alabama's higher education framework as the largest historically black higher education institution in the state.

*Total enrollment grew to an all time high of 5,726 full-time equivalent students in fall 2013. The university was able to able to achieve 9.1% growth in student charges in fiscal 2013.

OUTLOOK

The negative outlook reflects expectations for further erosion of flexible reserves and inability to cover debt service from operations. The negative outlook also incorporates the uncertain outcome of the SACSCOC Warning.

WHAT COULD CHANGE THE RATING UP

An upgrade or move to stable outlook could be considered if Alabama State University is able to sustainably improve operating performance and debt service coverage while increasing liquidity. Upward movement could also be aided by a meaningful reduction in financial leverage either through a material reduction in debt or substantial increase in operating revenue and flexible reserves. Positive resolution of accreditation review is also critical to credit improvement. Demonstrated management stability and improved governance and management best practices are essential for credit improvement.

WHAT COULD MAKE THE RATING GO DOWN

A rating downgrade remains likely if the university not be able to generate operating cash flow sufficient to cover debt service commitments. A further erosion of liquidity or increased reliance on operating lines could also trigger a downgrade. More rapid credit deterioration could occur should the university be unable to resolve the accreditation Warning.

METHODOLOGY

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. The additional methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. 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.

Mary Cooney
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

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 State University to Ba1 from Baa1; outlook negative
No Related Data.
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