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Rating Action:

Moody's downgrades Southern University System's, LA issuer rating to A3, revenue bond rating to Baa1; outlook negative

12 Jul 2013

Action affects $57.1 million of rated debt

New York, July 12, 2013 -- Moody's Investors Service has downgraded Southern University System's (SUS) issuer rating to A3 from A2 and revenue bond rating to Baa1 from A3. The rating action affects the system's Series 2006 bonds issued through the Louisiana Public Facilities Authority. The outlook is negative.

SUMMARY RATING RATIONALE

The downgrade reflects the system's deep and ongoing enrollment declines which, when combined with reductions in state funding, resulted in materially weaker operating performance in fiscal year (FY) 2012 with expectation of some, although limited, future revenue growth. The negative outlook reflects our expectation for continued enrollment challenges, some improvement in operating support from the state of Louisiana in FY 2014, and uncertainty surrounding success of the system's plans to grow enrollment and return to balanced operations.

The A3 issuer rating reflects the system's low level of financial resources that are further depressed by a large and growing OPEB liability, and dependence on the State of Louisiana for operating appropriations, which have been subject to multiple years of midyear reductions. Offsetting these challenges are the system's market position as a historically black college and university (HBCU) system with healthy growth in net tuition revenue and management's actions to reduce operating expenses when faced with the prospect of continuing revenue declines, including declaration of financial exigency.

The Baa1 revenue bond rating is notched one rating lower than the system's long term rating to reflect the risk of non appropriation from the State of Louisiana to the system to make debt service payments for the Series 2006 bonds.

CHALLENGES

*Substantial declines in operating performance in FY 2012 with operating cash flow margin of only 0.4% providing insufficient debt service coverage (0.14 times) as calculated by Moody's. Expectations are for slight improvements in performance in FY 2013 driven by tuition increases of approximately 10% at all campuses.

*Moderately high reliance on state appropriations (33% of Moody's adjusted operating revenue), which have diminished over time and been prone to mid-year cuts.

*Declining enrollment, driven by increased admissions standards and weak demographics. With standards expected to tighten in fall 2014, enrollment will likely be pressured further.

*Monthly liquidity is low relative to comparably rated peers with $34.2 million providing only 65 days cash on hand or coverage for just over two months of operating expenditures.

*The system is vulnerable to changes in federal financial aid programs, with 77% of net tuition revenue of $50.4 million in FY 2012 (as calculated by Moody's) derived from Pell Grants.

*Rapidly growing other post employment benefits (OPEB) liabilities which have decreased financial resources. In FY 2012 OPEB liability was $85 million, and even after adjusting for this liability expendable financial resources provide thin cover for direct debt at 0.12 times.

STRENGTHS

*Large, multi-campus, historically black college system with fall 2012 enrollment of more than 13,200 full time equivalent (FTE) students across 3 campuses with healthy growth in net tuition per student to $3,711 in FY 2012 up 20% from $3,091 in FY 2011.

*Expense reduction measures, including the rare declaration of financial exigency at the Baton Rouge campus, allowing that campus to cut approximately $7 million in FY 2013 largely through reduction of tenured faculty and staff.

*Support from the federal government in the form of annual appropriations of approximately $3.6 million, and through the HBCU Capital Loan Program (offered by the Department of Education) in which the system's New Orleans campus borrowed $44 million on very favorable terms (interest is capped at 1%).

Outlook

The negative outlook incorporates uncertainty in the success of management's transformation plan and our expectation that the system will continue to face enrollment challenges due to increased admission standards and soft demographics within its main service area, will generate thin cash flow, and continue to erode its balance sheet.

WHAT COULD MAKE THE RATING GO UP

Unlikely in the near-term given substantially weaker operating performance with only limited revenue prospects. Over the longer term, sustained improvements in operating performance, leading to material improvements in liquidity, growth of net tuition revenue and stable enrollment

WHAT COULD MAKE THE RATING GO DOWN

Ongoing deep operating deficits, enrollment declines, weakened liquidity, deterioration of balance sheet cushion to operations, issuance of material additional debt

PRINCIPAL RATING 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.

Faiza Mawjee
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

Karen L Kedem
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 Southern University System's, LA issuer rating to A3, revenue bond rating to Baa1; outlook negative
No Related Data.
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