New York, February 24, 2016 -- Summary Rating Rationale
Moody's Investors Service downgrades Eastern Illinois University's (EIU's) Auxiliary Facilities System (AFS) Revenue Bonds to Ba1 from Baa3 and the Certificates of Participation (COPs) to Ba3 from Baa3. The outlook is negative.
The downgrade is driven by EIU's increasing vulnerability to the ongoing state budget impasse given its thin liquidity, declining enrollment, and high reliance on state funding. Liquid reserves are expected to be exhausted by the end of the fiscal year. The ratings incorporate the expectation that EIU will take the necessary actions to cut expenses and manage cash flow to meet all obligations.
The Ba1 rating for the AFS Revenue Bonds is based on strong reserves within the AFS which roughly equal AFS debt outstanding and are legally restricted to support only AFS expenses and debt obligations. The AFS has historically been profitable, but also benefits from a priority claim on net tuition revenue should net AFS revenues be insufficient to cover debt service.
The Ba3 rating on the COPs reflects the increased risk of the COPs security pledge given the absence of a state budget, no receipt of any FY 2016 state appropriations, near exhaustion of unrestricted reserves, no access to external liquidity facilities, minimal funds at its foundation, and scant revenue anticipated until the next wave of tuition revenue in July/August. The next payment on the Series 2009 COPs of $3.7 million (net of the BABs subsidy) is on April 1, 2016 and the next payment on the Series 2005 COPs of approximately $146,000 is due August 15, 2016.
The negative outlook reflects the expectation that the university's liquidity position will remain severely pressured.
Factors that Could Lead to an Upgrade
Significant and sustained improvement in liquidity with consistent receipt of state operating appropriations
Strengthened student demand evidenced in net tuition revenue growth and stronger cash flow
Factors that Could Lead to a Downgrade
Insufficient cash flow to fund current operations or make debt service payments
Material decline in state appropriations, including on-behalf payments
Further credit deterioration of the state
Failure to replenish and build reserves following resolution of the budget impasse
Inability to stabilize enrollment or adjust expenses to balance operations
The revenue bonds are secured by the net revenues of the Auxiliary Facilities System (AFS), as well as mandatory student fees and tuition revenues, subject to the prior payment of operating and maintenance expenses of the Auxiliary Facilities System, but only to the extent necessary. There is a rate covenant to provide 2.0 times coverage of maximum annual debt service as well an additional bonds test. There is no debt service reserve fund. For FY 2015, pledged revenues provided 14 times MADS ($5.2 million reached in FY 2016).
The Certificates of Participation (COPs) are payable from both state-appropriated funds and from budgeted legally available funds of the university from sources other than state appropriations, including tuition and fees. The COPs are payable from the university's broad budget, and the obligation to pay can only be terminated in the event that the university does not receive sufficient state appropriations and does not have other legally available funds. While the COPs typically benefit from the breadth of revenue available to pay debt service, the lack of state appropriation and severe budgetary and liquidity pressures materially weakens COP security for EIU relative to the AFS bonds in the current environment.
Use of Proceeds
Eastern Illinois University is a regional public university, founded in 1895, located in Charleston, approximately 50 miles south of Champaign. EIU offers baccalaureate and master's degrees in education, business, arts, sciences, and humanities to about 8,500 headcount students in fall 2015.
The principal methodology used in this rating was Global Higher Education published in November 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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Moody's downgrades Eastern Illinois AFS bonds to Ba1 and COPs to Ba3; outlook negative
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007