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Rating Action:

Moody's downgrades Azusa Pacific University (CA) to Ba1; rating under review for downgrade

17 Sep 2018

NOTE: On September 21, 2018, the press release was corrected as follows: The second sentence of the second paragraph of the Legal Security section was changed to “It is required to maintain minimum unrestricted and temporarily restricted net assets of $55 million, and a debt service coverage ratio of 1.2x”; the last two sentences of the third paragraph of the Legal Security section were changed to “The university was compliant on the other covenant. It had $67 million of unrestricted and temporarily restricted net assets compared to the $55 million required;” and in the last sentence of the Profile section, the number of full-time equivalent students at APU was changed to 10,000. Revised release follows.

New York, September 17, 2018 -- Moody's Investors Service has downgraded the rating on Azusa Pacific University's (APU) series 2015B bonds to Ba1 from Baa3 and placed the rating under review for downgrade. The actions affect approximately $61 million of debt.

RATINGS RATIONALE

The downgrade to Ba1 is driven by a combination of significant weakening of operating performance in fiscal 2018, APU's inability to meet its covenant on debt service coverage ratio which resulted in an event of default, and weak internal reporting and expense control processes. The rating is under review for downgrade as there is a significant liquidity risk if APU is unable to secure waiver on its covenants and show improvement in fiscal 2019 operating performance.

APU's unaudited fiscal 2018 operating results point to significantly weaker performance than the fiscal 2018 projections provided in February 2018. While revenue was reportedly largely in line with the projections, management indicates that expenses were higher by over $8 million. Our review will focus on APU's final audited 2018 financial results which are expected to be available within the next two months. We will also review the university's ability to secure a waiver on covenant violations on the Series 2015B bonds and from Wells Fargo on Series 2015A bonds and to meet financial covenants in December 2018. The rating could be downgraded further if APU is unable to improve operating performance in fiscal 2019 or if APU does not take necessary steps to improve its internal reporting and expense control processes. Rapid credit deterioration could occur if debt is accelerated as the college does not have sufficient unrestricted liquidity to meet all potentially accelerated obligations.

The university's Ba1 rating incorporates its large scale of operations and diverse program offerings and student profile. The rating also considers the university's heavily reliance on student charges for operating revenue, which leaves the university vulnerable to fluctuations in student demand, and the university's comparatively thin liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Significant strengthening of liquidity and spendable cash and investment cushion to expenses

- Reduction in debt structure risks

- Material improvement in operating performance

- Sustained growth of enrollments and net tuition per student

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Inability to secure waiver on covenants, leading to debt acceleration and significant deterioration of liquidity

- Further breach of covenants in December 2018

- Inability to improve operating performance in fiscal 2019 and beyond

LEGAL SECURITY

The Series 2015B Bonds are a general obligation of the university, secured on a parity basis with the Series 2015A direct placement by a gross revenue pledge, the East Campus (core campus of the university) and personal property of the university.

The university is required to meet certain covenants, tested on June 30 and December 31 on these bonds. It is required to maintain minimum unrestricted and temporarily restricted net assets of $55 million, and a debt service coverage ratio of 1.2x. Additionally, there is an intercreditor agreement between the trustee of Series 2015 B bonds and Wells Fargo and a cross default provision under which an event of default on Series 2015B bonds will constitute an event of default on Series 2015A bonds.

The university's reported debt service coverage ratio for June 30, 2018, was 0.5x versus 1.2x required, resulting in an event of default on these bonds as well on the Series 2015A bonds. In the event that APU does not secure a waiver on this covenant, the debt could be accelerated. The university was compliant on the other covenant. It had $67 million of unrestricted and temporarily restricted net assets compared to the $55 million required.

APU has one interest rate swap hedging its variable rate Series 2015A Bonds with Wells Fargo Bank, N.A. The swap adds some counterparty risk as well as bank concentration with Wells Fargo. The swap has a $65 million notional amount, and as of June 30, 2018 was a $13.6 million liability for the university. Any additional payment or collateral posting on this swap would further pressure the university's already thin liquidity.

USE OF PROCEEDS

Not applicable

PROFILE

Azusa Pacific University (APU) was founded in 1899 as an evangelical, Christian university and is located 26 miles northeast of Los Angeles in the City of Azusa in the San Gabriel Valley. The university has two main campuses, an online entity and six regional centers throughout the area. APU has over 10,000 full-time equivalent students and total operating revenue of $266 million.

METHODOLOGY

The principal methodology used in this rating was Higher Education published in December 2017. Please see the Rating Methodologies 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 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.

Pranav Sharma
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

Susan Fitzgerald
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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