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Rating Action:

Moody's upgrades Liberty University's (VA) bonds to Aa3; outlook stable

Global Credit Research - 09 Sep 2013

$99M of rated debt affected

New York, September 09, 2013 -- Moody's Investors Service has upgraded to Aa3 from A1 the rating on Liberty University's Series 2012 taxable bonds with $99 million outstanding. The upgrade reflects Liberty's remarkable momentum in revenue growth and cash flow from operations. This momentum, if continued, will produce sufficient cash to fund transformative capital investments as well as to build reserves over time. The growth in revenue and cash and investments makes Liberty a true outlier in Moody's portfolio of not-for-profit universities. Between FY 2008 and FY 2012, operating revenue grew 630%, while total cash and investments increased 148%--more than twice the growth of any other rated university on either measure. The rating outlook is stable.

SUMMARY RATING RATIONALE

The upgrade and Aa3 rating reflects the increasing scope of the University's activity (up 14% to $728 million based on draft information for fiscal 2013), its large pool of financial reserves ($728 million of total financial resources in FY 2012), uncommonly strong operating performance, and discipline around building and maintaining reserves. Cash and investments increased $295 million in fiscal 2013, surpassing the $1 billion mark based on draft reports.

The university's strongly religious character is both a strength and a challenge as it has successfully attracted a growing portion of those students seeking this type of experience but will limit appeal to a broader audience. Additional credit challenges include limited revenue diversity with 89% reliance on student charges based on draft fiscal 2013 data, modest fundraising, and limited pricing power with net tuition per student of $10,346 and brand identity built partially around affordability.

STRENGTHS

*Liberty benefits from a large and growing student market supported by an extensive array of online programs with full-time equivalent (FTE) enrollment of over 50,000 making it one of the largest private universities in the US. Brand strength is built on the university's Christian identity, lower cost, and residential campus experience including intercollegiate athletics.

*Liberty exhibits uncommonly strong operating performance with a three-year average operating margin of 36% through fiscal 2012. The University retains flexibility in its expense base by utilizing full-time and adjunct faculty for online courses for scalability and only offering tenured positions to Law School faculty.

*The university has an ongoing trend of dramatic balance sheet growth from retained surpluses that continued in FY 2013 with a 41% increase in cash and investments. Preliminary results show total cash and investments over $1 billion as of June 30, 2013. Financial reserves are predominantly liquid and free from restrictions with $461 million of funds unrestricted and able to be liquidated within a month at FYE 2012.

*Prospects for sustained strength in online enrollment growth are good given institutional prowess, academic cost structure, and economies of scale.

CHALLENGES

*The university has limited revenue diversity, with student charges comprising 91% of FY 2012 revenues. The University's explosive enrollment growth, diversity of academic programs, and relatively low cost help mitigate the risks of concentrated revenues.

*The university has ongoing capital investment needs for residential program with $329 million of pending projects through 2017 dependant on meeting growth targets. Future investments are likely to be funded from operating cash flow.

*With distinct political interests and religious activities of the campus community, Liberty University has faced challenges in the past to its tax-exempt status.

*Given the limited number of and relatively young age of alumni base, fundraising has remained modest averaging $12 million per year or $220 per student in fiscal 2012.

*Governance and management structure and practices are evolving but decision-making remains relatively concentrated with the Chancellor/President and Liberty has less institutionalization of best practices than more established universities. Governance practices require the board to ascribe to a Liberty University Doctrinal Position, which strengthens the institutional culture but limits diversity of opinion.

OUTLOOK

The stable outlook reflects expectations of continued student market strength, extraordinary cash flow supporting growth of flexible reserves as well as the bulk of funding for capital investments. The outlook also reflects expectations of slow improvement in revenue diversity and absence of plans for additional debt.

WHAT COULD MAKE THE RATING GO UP

An upgrade could be supported by the continuation of recent trends including continued student market strength and resource growth, combined with limited additional debt. While the young university has made significant improvements in its governance and management over the last several years, a future rating upgrade would be dependent on continued evolution and institutionalization of best practices. Recent improvements include long-range operating and capital planning, defining the proper amount of flexible reserves to maintain and implementation of an Investment Policy Statement.

WHAT COULD MAKE THE RATING GO DOWN

Downward pressure could follow a decline in balance sheet strength, marked increased in operating leverage, material deterioration in operating performance, leadership disruption, dislocation of residential or online student market segments, or loss in tax-exempt status.

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.

Dennis M. Gephardt
Vice President - Senior 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

Edith F Behr
VP - Senior Credit Officer
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 upgrades Liberty University's (VA) bonds to Aa3; outlook stable
No Related Data.

 

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