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Rating Action:

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

Global Credit Research - 21 Jan 2014

$233.1M debt affected

New York, January 21, 2014 -- Moody's Investors Service has downgraded Alabama State University's revenue bond rating to Baa1 from A3, and downgraded the Series 2005 lease revenue bonds to Baa2 from Baa1. The outlook is negative. This rating action concludes Moody's review of Alabama State University for downgrade, which was initiated on October 18, 2013.

The downgrade reflects the university's weakened operating performance and flexible reserves in fiscal 2013 combined with ongoing public and stakeholder relations issues including a forensic investigation requested by the governor, sexual harassment litigation, and an informational request from its regional accrediting body.

SUMMARY RATING RATIONALE

The downgrade to Baa1 reflects the weakening financial health of the university as evidenced by five years of declining cash and investments. Strained operating performance in recent years has resulted in less than one times debt service coverage for the last two years, an especially notable challenge given the university's uncommonly high operating leverage with debt to operating revenue of 1.9 times. The downgrade also incorporates leadership, management, and governance challenges and lack of best practices which we believe will make return to financial stability in the short term more challenging.

The Baa1 rating is supported by Alabama State University's market niche as a historically black university (HBCU) in Alabama with recent enrollment growth. The Baa2 rating on the Series 2005 lease revenue bonds, rated one level below the university's highest rating, incorporates 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 expectations for further resource erosion of flexible reserves combined with the university's failure to date to make material expense cuts in light of softened revenue. The outlook also incorporates uncertainty regarding the outcome of the Forensic Strategic Solutions' (FSS) investigation, the cost associated with the university's litigation against FSS, the potential call on liquidity if the swap is terminated by the counterparty, and any accreditation sanctions that may arise.

CHALLENGES

*Management's inability or unwillingness to significantly cut operating expenses and staunch expense growth as operating revenues stagnated in fiscal 2012 and 2013 are symptoms of weak governance that could continue to erode flexible reserves.

*Management faces considerable extraordinary events that distract from the normal university operations as the university transitions to a recently appointed university president. These events include a forensic investigation prompted by the governor, a recently concluded sexual harassment lawsuit, pending litigation against the forensic financial firm, and inquiries from the college's accreditor.

*Operating performance has markedly deteriorated as expense growth over the past three years (FY 2010-2012) of 15.5% has markedly exceeded revenue growth of 5.0%. The FY 2012 operating deficit of 4.6% and debt service coverage of 0.9 times starkly contrasts with FY 2008 results of 1.5% operating margin and 1.5 times debt service coverage.

*The university's cash and investments have declined substantially since 2008, limiting ASU's financial flexibility in the event of delayed state payments or calls on liquidity. Cash and investments dropped to $43.2 million in FY 2012 from $51.5 million in FY 2008, with further marked erosion expected in FY 2013.

*ASU is extremely leveraged, with $239.2 million of direct debt in FY 2012 compared to $45.1 million of expendable resources and operating revenues of $123.3 million.

STRENGTHS

*The executive branch of the state has become more involved with the governance of the university over the last few months, and the governor has begun to regularly attend university board meetings. This has strengthened the university's relationship with the state and added additional oversight. The adversarial relationship with the executive branch seems to have softened since the forensic investigation was first ordered.

*ASU enjoys a good market position as Alabama's largest historically black higher education institution and serves a vital role in the Montgomery area. Total enrollment grew to an all time high of 5,726 full-time equivalent students in fall 2013.

OUTLOOK

The negative outlook reflects expectations for further resource erosion of flexible reserves due to ongoing operating pressures combined with potential repercussions of the Forensic Strategic Solutions' (FSS) investigation, the cost associated with the university's litigation against FSS, the potential call on liquidity if the swap is terminated by the counterparty, and any accreditation sanctions that may arise.

WHAT COULD MAKE THE RATING GO DOWN

Continued inability to cover debt service from operations, further erosion of liquidity, or declining enrollment could result in a downgrade, as could negative outcomes from the forensic investigation or accreditor scrutiny.

WHAT COULD MAKE THE RATING GO UP

Return to financial stability as demonstrated by consistent debt service coverage and rebuilding of reserves, combined with implementation of financial and other management best practices could improve the rating over time.

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.

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

Eva Horton Bogaty
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 Baa1; outlook negative
No Related Data.

 

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