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Rating Action:

Moody's revises Elizabeth City State University's (NC) outlook to negative; affirms A3 rating

Global Credit Research - 22 Oct 2013

$18.7M debt affected

New York, October 22, 2013 -- Moody's Investors Service has affirmed its A3 rating on Elizabeth City State University's (ECSU) outstanding revenue bonds. The rating outlook has been revised to negative from stable. The outlook revision reflects the university's deterioration in market demand that significantly exceeded expectations, and the resulting deterioration in operating performance from contracted enrollment, auxiliary revenues, and grant funding.

SUMMARY RATING RATIONALE

The A3 rating reflects the university's market niche as a historically black public university within the University of North Carolina System with a $73.5 million revenue base in FY 2012, consistently solid support for operations and capital from the Aaa-rated state, and a modest debt burden relative to financial resources and operations. These factors are offset by a history of thin operating cash flow from operations, weak student demand that has been exacerbated by recent changes to admissions standards implemented by the university system, and limited financial resources.

The negative outlook reflects the expectation that the university may face continued enrollment declines and difficulty in increasing student revenue and balancing operations. The precipitous decline in enrollment has contributed to two years of negative operations and is expected to result in a $5 million revenue shortfall in FY 2014. While the university has made expense cuts and expects to offset the revenue loss, we expect enrollment will not regain historical highs and operating cash flow performance will remain challenged.

CHALLENGES

*Fall 2013 marks the third consecutive year of enrollment declines, culminating in a 26% decline in full-time equivalent enrollment from 3,112 FTEs in fall 2010 to 2,301 FTEs in fall 2013.

*The university has a longstanding history of deficit operations, as calculated by Moody's. The university has incurred operating losses resulting in a three-year (FY 2010-FY 2012) average operating margin of negative 0.3%. FY 2013 projections show a deeper deficit, with an operation margin of -3.5%.

*The university's financial resource base is small, with total financial resources of $26.4 million in FY 2012 compared to the FY 2012 A3 median of $33.8 million. Unrestricted monthly liquidity is also relatively thin at $12 million equating to 62 monthly days cash on hand at FYE 2012.

*ECSU faces considerable competition for students which has markedly heightened in recent years, with fall 2013 yield on admitted students of 20.5% as compared with 34.6% in fall 2010.

STRENGTHS

*There has been consistently strong state support for this historically black university from the Aaa-rated State of North Carolina. Continued state operating and capital appropriations underpin the A3 rating of Elizabeth City State University (ECSU). While the outlook for state operating support is constrained, we believe North Carolina will continue to provide substantial operating and capital support to ECSU.

*The demographically vibrant State provides potential for enrollment stabilization over the longer term. As one of the 16 members of the University of North Carolina System, the university benefits from growth in the State's pool of potential students. Through 2020, the number of high-school graduates in the State is expected to increase by 5% since 2009.

*The university's debt burden is modest compared to peers, with expendable financial resources cushioning debt 0.54 times comparing favorably to the A3 rated median of 0.38 times.

OUTLOOK

The negative outlook reflects the expectation that the university may face continued enrollment challenges and difficulty in increasing student revenue and balancing operations.

WHAT COULD MAKE THE RATING GO UP

An upgrade at this time is highly unlikely. However, the outlook could be revised to stable if the university is capable of structurally balancing operations through permanent expense reductions and stabilizing enrollment.

WHAT COULD MAKE THE RATING GO DOWN

The rating could be negatively pressured if the university experiences further erosion of student demand and continued enrollment declines, or if the university is incapable of balancing operations and that results in a draw down on their already limited financial resources. Issuance of additional debt without commensurate growth in resources could also pressure the rating. Negative pressure could also result from the Clery Act investigation including potential penalties, reputational harm or other consequences.

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.

Caitlin Bertha
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

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
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's revises Elizabeth City State University's (NC) outlook to negative; affirms A3 rating
No Related Data.

 

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