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Rating Action:

Moody's downgrades Fort Valley State University Foundation Property, LLC's (GA) rating to Baa1 from A3; rating remains on review for possible further downgrade

23 Oct 2012

Rating action impacts $43.3 million of rated debt outstanding; bonds are supported by lease pledge of the Board of Regents of the University System of Georgia

New York, October 23, 2012 -- Moody's Investors Service has downgraded its rating on the Development Authority of Peach County Georgia's Student Housing Facilities Revenue Bonds (Fort Valley State University Foundation Property, LLC Project) Series 2006 to Baa1 from A3. The bonds were issued on behalf of Fort Valley State University, a component of the Board of Regents of the University System of Georgia. The rating remains under review for possible further downgrade. FVSU's rating was placed on review for possible downgrade on July 13, 2012.

SUMMARY RATING RATIONALE

The downgrade reflects the university's negligible financial resource cushion, very limited cash position, fall 2012 enrollment decline, decrease in state operating support, and repeated deficiencies cited by the state auditor with regard to financial controls. The Baa1 rating also incorporates the Board of Regent's (BOR) broad lease revenue pledge, strategic importance of the bonded project to Fort Valley State University (FVSU), the university's important role to the University System of Georgia as a historically black land grant university, heightened oversight of the Board of Regents, improved financial stewardship as evidenced by the decline in deficiencies cited by the university's auditors, and improved cash position relative to FY 2011.

The rating downgrade also incorporates concern resulting from the university's accreditation being placed on warning by the Southern Association of Colleges and Schools (SACS) due to the university's failure to comply with standards associated with faculty competence, control of finances, and Title IV program responsibilities. The university submitted their monitoring report to SACs October 18, 2012, and anticipates that SACS will make a decision during its December 2012 meeting.

Our review will focus on the outcome of the SACS meeting in early December 2012, the university's cash position, operating performance, and expected enrollment for Spring 2012. Our review period is expected to conclude within 60 days.

CHALLENGES

*Minimal resources with $1.4 million of cash and investments and monthly liquidity providing just seven day's cash on hand as of June 30, 2012.

*Accreditation placed on warning by SACS; written follow-up documentation submitted by FVSU October 18th. Potential outcomes of SACS' December ruling include continued warning status, placing FVSU's accreditation on probation, which is more serious than warning, or removal of warning with or without continued monitoring.

*Extremely leveraged balance sheet, with expendable financial resources of $848 thousand in FY 2012 providing a near zero cushion of just 0.01 times to debt and operations.

*Inconsistent operating performance, with a 5.7% deficit in FY 2012 as compared to near break-even operating performance in FY 2009. FY 2013 is already facing operating challenges with fall 2012 enrollment below projections and state appropriation cuts resulting in a combined $3.8 million budget reduction.

*Challenging state funding environment with fluctuating state appropriations, including a 3% cut to FVSU's FY 2013 appropriation with the possibility of an additional 2%, and cuts made to tuition assistance programs from the state. State appropriations comprise 33% of operating revenue in FY 2012, down from 41% in FY 2009.

*Bank agreement debt well in excess of monthly liquidity ($19.5 million with an expiration of the initial rate on December 10, 2014).

*Board's rental payments are annually renewable with no legal obligation to renew.

STRENGTHS

*Annually renewable broad revenue pledge for rental payments from the Board of Regents of the University System of Georgia (lease revenue debt rated Aa3), not limited to the revenue of the projects or campus.

*Strategic importance of the facility to FVSU and project approval by the Board of Regents, coupled with fee revenues providing greater than 1.0 times debt service coverage on the 2006 bonds.

*Important role of Fort Valley State University as a historically black land grant university.

*Heightened BOR oversight with the implementation of quarterly reviews comprised of interim financial statements and a comprehensive questionnaire to serve as an early warning system.

*Improved financial stewardship with the permanent assignment of a new VP of Finance with deep experience in University System of Georgia, and evidenced by a significant decrease in auditor findings related to financial controls and an increase in the university's cash position.

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:
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 Fort Valley State University Foundation Property, LLC's (GA) rating to Baa1 from A3; rating remains on review for possible further downgrade
No Related Data.
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