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19 Dec 2019
New York, December 19, 2019 -- Moody's Investors Service has downgraded the ratings on the University of Tulsa's (OK) revenue bonds and student housing bonds to Baa3 from Baa1. The outlook is negative. This action impacts approximately $85 million of rated bonds issued through the Tulsa Industrial Authority, Oklahoma.
RATINGS RATIONALE
The two notch downgrade to Baa3 reflects University of Tulsa's (TU) very weak operating performance resulting in further erosion of liquidity and an increasingly heavy reliance on a line of credit. A significant 24% decline in net tuition revenue over the fiscal 2015-19 period and concurrent rise in expenditures per student highlight the university's current fundamental fiscal imbalance. Deficits have been funded through the use of reserves and quasi-endowment, decreasing available monthly liquidity to a thin 28 days in fiscal 2019, inclusive of draws on the line of credit. Operating cash flow has been insufficient to cover debt service over the fiscal 2015-19 period. Net tuition revenue growth has been adversely affected by a shifting student market, including loss of international students and further marked by stiff competition for students driving increasing tuition discounting.
The Baa3 rating acknowledges University of Tulsa's significant wealth with $553 million of cash and investments and benefitting from sizable external trusts providing over $25 million of support annually. Donor support has been strong and a critical element of its still investment grade quality. TU is currently engaged in a strategic plan for optimizing enrollment, realigning academic programs and reducing the university's currently unsustainable cost structure. If successful, the plan has prospects for gradually improving operations, although management will likely continue to confront headwinds during implementation. Though financial leverage reflected by spendable cash and investments to debt is a moderate 1.5x, debt service is currently not affordable due to weak cash flow.
The Baa3 rating on the subordinate student housing revenue bonds incorporates a debt service fund replenishment feature from the trust supporting the university, resulting in a similar rating to the senior revenue bonds.
RATING OUTLOOK
The negative outlook incorporates our expectations that fiscal 2020 operations will remain weak and indicates the potential for downward pressure should TU fail to stabilize net tuition revenue and reduce expenses, decreasing the reliance on line of credit.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Sustained stronger operating cash flow and debt service coverage
- Material strengthening of the university's student market position, highlighted by growing overall net tuition revenue and increasing net tuition per student
- Substantial growth in unrestricted liquidity without reliance operating line of credit
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Loss or disruption in access to working capital line of credit
- Larger than currently projected fiscal 2020 deficit or inability to make material progress over the next two years to improve net tuition per student and cash flow from operations to sustainably cover debt service
- Reductions in donor support for operations or capital
- Material increase in debt
LEGAL SECURITY
TU's tuition-backed revenue bonds (Series 2011, 2017 and 2019 bonds) are general obligations, secured by an interest in pledged tuition revenues. In addition, the Series 2011 bonds have a mortgage on a portion of the university's campus (includes a portion of land that the Series 2013 housing revenue bonds project is located). All revenue bond series have associated debt service reserve funds and a financial covenant to meet an Available Funds Ratio of not less than 0.5 times at all times during the fiscal year. Should this ratio fall below 0.5 times, TU must deposit collateral with a third party in an amount to satisfy the ratio requirement. As of June 30, 2019, the university's Available Funds Ratio was 1.45x.
The Series 2013 and 2015 student housing revenue bonds are general obligations with a security interest in the university's gross housing fee revenues (net of certain sorority housing revenues). Each series has its own debt service reserve fund, which is funded at maximum annual debt service (MADS). The bonds have a 1.0 times rate covenant after all operating and maintenance expenses and an additional bonds test of 1.5 times MADS. The fiscal 2019 gross pledged housing fee revenue totaled $17.4 million and net housing fee revenue was $14.3 million, providing MADS of $4.06 million with coverage of 3.5x.
The student housing bonds are supported by a Reserve Fund Replenishment Agreement of the J.A. Chapman and Leta M. Chapman Charitable Trust (the 1966 trust). Under the terms of the agreement, the 1966 Trust will pay any deficiency in loan payments directly to the trustee on or before the debt service payment date, drawing from quarterly distributions (fiscal 2019 total annual receipt of $15 million).
We do not distinguish between the ratings on the student housing bonds and the outstanding tuition revenue bonds because of the support provided by the Reserve Fund Replenishment Agreement. The student housing bonds are subordinate to the tuition-backed revenue bonds, and cannot be accelerated as long as tuition revenue bonds remain outstanding. Payment of the student housing bonds is suspended during any period the payment obligation of the tuition revenue bonds are in default or while the university is in bankruptcy. The 1966 Trust reserve fund replenishment agreement does not apply to the tuition revenue bonds.
PROFILE
The University of Tulsa is a private coeducational institution, originating in 1894. TU offers comprehensive academic programs, in addition to doctoral research programs. For fiscal 2019, TU recorded $201 million in operating revenue and for fall 2019 enrolled 4,208 full-time equivalent (FTE) students.
METHODOLOGY
The principal methodology used in these ratings was Higher Education published in May 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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.
Mary Cooney
Lead Analyst
Higher Education
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Susan Fitzgerald
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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