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Rating Action:

Moody's downgrades Howard University (DC) GO bonds to Ba2; reviews for downgrade

05 Jun 2015

$290M rated debt

New York, June 05, 2015 -- Moody's Investors Service downgrades to Ba2 from Baa3 $290 million Howard University Revenue Bonds, Series 2011 A and 2011 B issued by the District of Columbia. Simultaneously, we are placing the rating under review for downgrade.

SUMMARY RATING RATIONALE

The downgrade to Ba2 reflects the cumulative effect of ongoing losses at both Howard University Hospital and Howard University combined with expected continued pressure on revenue and liquidity management. Required collateral posting, modest unrestricted liquidity, and reliance on bank lines further support the magnitude of the downgrade.

The Ba2 acknowledges the significance and stability of federal support and the university's longstanding reputation as a venerable Historically Black College and University. The rating also incorporates an expectation of realized benefit from expense reduction measures, including layoffs, already in place as well as additional measures being contemplated.

The rating also reflects high financial leverage including fixed charges for debt, pension and healthcare benefits, and leases. It also incorporates expense pressures from current negotiations with hospital personnel and a rising tuition discount rate that limits revenue growth. Last, the Ba2 recognizes the near term challenges of synergizing a full suite of new senior level managers at a time of financial and operational stress.

OUTLOOK

The review will focus on the sustainability of expense reduction strategies and operating stabilization by an assessment of the FY 2016 budget, cash flow projections, and ongoing operations. Key to the review will be the successful extension of the outstanding revolving credit agreement and provision for additional liquidity.

WHAT COULD MAKE THE RATING GO UP

• Sustained balanced operations

• Restoration of liquidity sufficient to address unforeseen calls on capital and to provide a cushion for the liquidity covenant

• Demonstrated ability to repay working capital loans during the fiscal year in which they were drawn

WHAT COULD MAKE THE RATING GO DOWN

• Inability to extend the revolving credit agreement and make provision for additional liquidity

• Failure to restore fiscal balance to the university and the hospital

• Reduction of cash and investments

• Material increase in debt

OBLIGOR PROFILE

Howard University is a private not-for-profit historically black college and university in Washington, D.C. with 9,500 full-time equivalent students and $800 million in operating revenue. It is known for its undergraduate health sciences, business, marketing, and communication programs as well as its graduate programs in business, law, and medicine. The university owns the Howard University Hospital where medical students do their internships, residencies, and/or fellowships and members of its faculty practice.

LEGAL SECURITY

The revenue bonds are an unconditional general obligation of the university. There is a rate covenant of 1.1 times and an additional bonds test that requires a certificate of the university's chief financial officer concluding that projected debt service coverage will be at least 1.1 times upon issuance and, on a proforma basis for the following fiscal year. If the debt service coverage falls below 1.1 times, the university will not be in default as long as it hires a consultant and does not drop below 1 times coverage as defined in the Loan Agreement. In addition, there is a negative pledge on certain real estate and, for the Series 2011A bonds only, a one-half maximum annual debt service reserve fund.

Bank of America, N.A. is the lead bank on the multi-bank credit agreement that expires June 24, 2015. There are two financial covenants, a debt service coverage covenant of 1.25 times and a liquidity covenant of 25%. As of June 30, 2014, the university had breached its debt service coverage covenant and the university was required to post collateral worth $129 million. The university is still in violation of its debt service covenant ratio and, as of May 31, 2015, the collateral posting had risen to $134.5 million.

USE OF PROCEEDS

Not applicable.

PRINCIPAL 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.

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.

Edith F Behr
VP - Senior Credit Officer
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

Susan I Fitzgerald
Senior Vice President
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 Howard University (DC) GO bonds to Ba2; reviews for downgrade
No Related Data.
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