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Rating Action:

Moody's revises Texas Southern University's outlook to stable; affirms Baa3

04 Aug 2017

New York, August 04, 2017 -- Summary Rating Rationale

Moody's Investors Service has affirmed the Baa3 ratings for Texas Southern University's (TSU) revenue system financing bonds. The rated Series 2011, 2013 and 2016 bonds outstanding in the combined amount of $120 million were issued through the Texas Public Finance Authority (TPFA). The outlook has been revised to stable from negative.The outlook revision to stable acknowledges improved fiscal discipline leading to stronger cash flow margins exceeding debt service coverage over the last three fiscal years and expected for fiscal 2017. Consistent operating and capital support from the Aaa-rated State of Texas adds further stability to TSU's credit profile. The Baa3 rating reflects very strong operating and capital support from the Aaa-rated State of Texas, with a history of extraordinary support. TSU's strong state relationship provides significant uplift for its rating. The investment grade rating incorporates TSU's location in the highly competitive, but vibrant Houston region, favorable progress in strengthening cash flow, stabilizing enrollment, and steps taken by the university to improve its recruitment and retaining of students. Ongoing challenges include TSU's narrow financial reserves and high leverage. Considerable reliance on a price sensitive student body and very modest donor support limit revenue diversity.

Rating Outlook

The stable outlook reflects our expectation that TSU will continue to be solidly supported by the state for both operations and capital and that the university will sustain its fiscal discipline, with cash flow exceeding debt service and controlling expenses while implementing its strategic plan to grow enrollment.

Factors that Could Lead to an Upgrade

Substantial and sustained liquidity and reserve improvement, providing a stronger cushion relative to debt and operations

Stability in enrollment and sustained growth of net tuition revenue

Factors that Could Lead to a Downgrade

Insufficient debt service coverage from operations

Disruption or downturn in state financial support

Material or sustained erosion of liquidity

Legal Security

The Revenue Financing System debt is secured by a broad pledge of revenue, including tuition, fees, and auxiliary revenue, and certain unappropriated funds and reserve balances. The pledge excludes state appropriations and other restricted funds. Pledged Revenues in FY 2016 totaled $86 million, providing 3.9 times coverage of pro forma debt maximum annual debt service (MADS).Both the Series 2013 and 2016 bonds are secured by separate surety bonds from Build America Mutual Assurance Company (BAM) for their respective debt service reserves and the Series 2011 bonds are secured by a cash-funded debt service reserve fund. Roughly half the university's debt receives debt service reimbursement through state appropriations, although there is no legal pledge of this funding. TSU received $9.6 million and will receive $13.8 million in debt service reimbursement from the State of Texas for FYs 2016 and 2017, respectively.The Series A 2011-4 and Series A 2012-10 fixed rate bonds financed through the Department of Education are on parity with the Revenue Financing System debt. The Loan Agreements for both series contain a rate covenant which requires net Pledged Revenues to provide a minimum of 150% of maximum annual debt service. As of the most recent reporting date, August 31, 2016, the university was in compliance with the financial covenant. The coverage of 3.3 times provided good headroom for covenant compliance.Failure to maintain minimum debt service coverage could be deemed a default. If TSU fails to meet the rate covenant, it is required to establish and maintain a Liquidity Reserve Account to be funded with annual deposits of $200,000 from Pledged Revenues until the account reaches $1 million. The Liquidity Reserve Account may be used to fund debt service on the two series, operating deficits, or extraordinary capital expenditures.

Obligor Profile

Texas Southern University is a moderate-sized urban, historically black university located in Houston. In FY 2016, the university recorded operating revenues of $183 million and enrolled 8,157 full-time equivalent students in fall 2016.

Methodology

The principal methodology used in this rating was Global Higher Education published in November 2015. 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 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 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.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Edith Behr
Additional Contact
Higher Education
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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