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Rating Action:

Moody's downgrades Howard University (DC) to Baa1; outlook negative

Global Credit Research - 24 Sep 2013

$290 M rated debt

New York, September 24, 2013 --

Moody's Investors Service has downgraded the District of Columbia Revenue Bonds (The Howard University Issue) Series 2011A and Series 2011B (Taxable) to Baa1 from A3, concluding the review that was initiated on July 8, 2013. The downgrade is driven by pressure on all of the university's major revenue sources. The negative outlook reflects an aggressive Fiscal Year 2014 budget that may prove difficult to implement in light of pressure on hospital operations, continuing soft enrollment, and a slow start to implementing planned efficiencies. It also reflects renewal risk associated with a revolving line of credit upon which the university relies for liquidity.

SUMMARY RATING RATIONALE

Howard University operates in a challenging operating environment. It is a private university, but is heavily supported by the US (Aaa stable) government. It owns and operates a hospital that serves as the safety net hospital for the university's immediate neighborhood in Washington, D.C., but does not receive direct local support. The hospital has been a drag on the university's financial condition and, in Fiscal Year (FY) 2013, the hospital experienced a sharp decline in admissions and a shortfall of $17 million in revenue from hospital operations.

The downgrade of Howard University's rating to Baa1 reflects this loss of patient volume and revenue. It also reflects a marked drop in enrollment in Fall 2012 and cuts in direct appropriations from the federal government. At the same time, fundraising is weak. Operations for FY 2013 were only positive due to nonrecurring financial solutions that kept the university from posting an operating loss.

The negative outlook is predicated on continuing challenges. The university's FY 2014 budget, while balanced may be difficult to achieve as initiatives to lower payroll and other costs may prove increasingly difficult. At this time, the university has solicited proposals for another party to manage, joint venture, or buy the hospital. The outcome of this initiative could result in separation of the hospital from the university allowing the university to cut its losses, but the ability to find an appropriate partner and the willingness of the university to make difficult choices regarding its hospital and longstanding clinical care operation remain uncertain. In addition, the $135 million multi-bank credit agreement upon which the university relies for liquidity is due to expire in June 2014.

The rating benefits from the university's solid reputation as a comprehensive, research-intensive Historically Black College & University with consistent and meaningful direct annual support from the US government. Other strengths include over $0.5 billion in total cash and investments and fairly liquid investments translating to five months cash on hand in addition to the $135 million working capital line. The university's operating cash-flow margin of approximately 10% in FY 2013 provided over three times estimated coverage of debt service.

CHALLENGES

*Hospital operations are a drag on university operations. The stand-alone academic medical center is largely dependent on Medicaid and market share eroded after the introduction of a new Medicaid managed care plan to the market last year. Revenues for FY 2013 were $17 million short of budget.

*The university is dependent on various revenues from the federal government and those revenues are declining. Cuts to the university's direct federal appropriation due to first year of sequestration will impact the university mostly in FY 2014. Research grant awards are also declining which will impact direct as well as indirect cost recovery.

*Tightening lending criteria for federal Parent PLUS loans contributed to a 6.3% reduction in enrollment in Fall 2012. While many of the loan denials were successfully appealed and enrollment is expected to partially recover in Fall 2013, the university will suffer from lower total enrollment for at least three more years. To address affordability, Howard froze tuition for Fall 2013.

*Cash-flow is more difficult for Howard to manage than other universities due to the fact that timing of payments from the federal government can be unpredictable. The university intends to renew the $135 million multi-bank credit agreement upon which the university relies for cash-flow before it expires on June 24, 2014.

*Corrective action may prove difficult to implement given transition of senior leadership, history of discord among board members, and other members of the Howard community that are not fully supportive of expense initiatives.

*Indirect debt including pension obligations and operating leases are significant. In addition, the university has agreed to reimbursement for certain operating expenses only after payment of debt service for two new privatized student housing facilities.

STRENGTHS

*The university has a strong and well-established reputation and is a leading black college in the US.

*The university benefits from almost one-quarter of one billion dollars annually in direct appropriations from the US government.

*Howard is relatively large with an estimated $520 million in total cash and investments for FY 2013 and $840 million of total revenues.

*Debt is relatively low with debt to revenue of 0.47 times and monthly liquidity covers demand debt by almost eight times.

*Total financial resources per student, monthly liquidity as a percentage of total cash and investments, and debt service coverage all compare favorably to other large private universities rated in the Baa category.

OUTLOOK

The outlook is negative reflecting an aggressive budget for FY 2014 that may prove difficult to implement in light of pressure on hospital operations, continuing soft enrollment, potential further cuts to federal appropriations, and a slow start to implementing planned efficiencies. It also reflects renewal risk associated with a credit agreement that expires on June 24, 2014.

WHAT COULD CHANGE THE RATING UP

Given the negative outlook, an upgrade is unlikely. A change to stable outlook could result from resolution of hospital ownership and management as well as stabilization of enrollment and other sources of revenue that lead to improved operating cash flow as well as augmentation of financial resources consistent with large A-rated universities. Due to the unpredictable timing of receipts from the federal government and more volatile patient care exposure, Howard's liquidity will need to be higher than many comparably rated peers. Upward pressure would also be aided by a marked increase in philanthropic support.

WHAT COULD CHANGE THE RATING DOWN

A downgrade could result if the university is unsuccessful in right-sizing its operations to align with reduced revenues, a reduction of liquidity or financial resources. Leading indicators could include further declines in enrollment, inaction as it relates to the hospital, or a drawdown of reserves to support operations. Failure to renew the bank credit agreement, less headroom under the financial covenants, or the issuance of more debt could also result in a downgrade.

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

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
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U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Howard University (DC) to Baa1; outlook negative
No Related Data.

 

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