New York, June 30, 2016 -- Summary Rating Rationale
Moody's Investors Service downgrades Southern Illinois University's (SIU) $231 million of Housing and Auxiliary Facilities System (HAFS) Revenue Bonds to Baa2 from Baa1 and the $39 million Certificates of Participation (COPs) rating to Baa3 from Baa1. The outlook is negative. This concludes the review for downgrade initiated on June 10, 2016.
The downgrades reflect SIU's heavy reliance on the State of Illinois (GO Baa2 negative) and prolonged absence of a state budget that will have a material negative impact on cash flow, already modest liquidity profile, and enrollment. The ratings positively incorporate SIU's sizeable operating scope and scale benefiting from a good market draw as a large, multi-campus comprehensive public university. A modest debt burden, strong cash management and prudent budget practices are also positive credit factors.
The Baa2 rating on the HAFS bonds is based on the System's healthy cash flow and debt service coverage, and strong reserves of approximately $60 milllion retained in a closed system at FYE 2016.
The downgrade to Baa3 rating on the COPs and credit distinction from the HAFS bonds reflects the unsecured nature of the pledge. It incorporates a still highly remote but increasing risk of termination of the purchase contract upon non-appropriation and non-availability of funds given the prolonged lack of a budget and drain on liquidity.
The negative outlook reflects SIU's exposure to ongoing potential reductions and delays in state funding with only moderate alternative revenue growth potential, given declining liquidity and weakening operating performance.
Factors that Could Lead to an Upgrade
Substantial and sustained growth of liquid reserves
Greater revenue diversification combined with stronger operating cash flow, demonstrating the ability to withstand reduced reliance on state support
Factors that Could Lead to a Downgrade
Continued reduction of liquidity
Significant decline in state appropriations, including on-behalf payments, or ongoing protracted timing delays of state funding disbursements that materially harms operating performance or the ability to pay debt service
Further deterioration of the state's credit quality
The Housing and Auxiliary Facilities System (HAFS) Revenue Bonds are secured by a pledge of and lien on the net revenues of the auxiliary system, pledged tuition (equal to MADS), the bond and interest sinking fund account, and the repair and replacement reserve account. The auxiliary system includes housing capacity for nearly 8,200 students, student unions, recreation and fitness centers, as well as a variety of other academic and student services on both campuses, and the parking facilities at Edwardsville. There is a rate covenant requiring that the net revenues and pledged tuition shall be equal to 120% of MADS. Unaudited net revenues and pledged tuition for FY 2015 provided 2.5 times coverage of MADS. There is also an additional bonds test of 120% of MADS. HAFS is a "closed" system, meaning that excess revenues generated by the HAFS cannot be applied to debt service for any other purpose. HAFS reserves remain favorable at approximately $62 million projected for FYE 2016.
The Certificates of Participation (COPs) are unsecured but payable from legally available funds. Legally available funds include student tuition (subordinate to the pledge to the Housing Auxiliary Facilities System and Medical Facilities System), certain fees, allowable grants, and investment income. The university established a mandatory per credit hour facilities maintenance fee, and management allocates a portion of these revenues to pay a portion of the debt service on the COPs. The obligation to pay on the COPs can be terminated in the event that the university does not receive sufficient state appropriations and does not have other legally available funds. The university has covenanted to request funds sufficient to pay debt service from the Illinois General Assembly in its annual operating budget request, and further covenants to include in each annual operating budget of the university an amount of legally available non-appropriated funds that, when combined with state appropriated funds, will be sufficient to cover debt service.
Use of Proceeds
SIU a large comprehensive university with undergraduate programs in liberal arts, education, science, business, agricultural sciences, communications, and engineering and also offers many graduate and professional degrees, in areas including business, law, pharmacy, medicine, dental and nursing. Fall 2015 total headcount enrollment was 31,557 students across its flagship Carbondale (SIUC) campus, Edwardsville (SIUE), and medical campuses with total operating revenue over $1.15 billion.
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 Southern Illinois University HAFS bonds to Baa2 and COPs to Baa3; outlook negative
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007