Published On: Fri, Sep 20th, 2013

MOODY’S CORPORATION : Moody’s assigns Aa3 to California State University’s $172.4M Lease Revenue Bonds, 2013 Series H issued by State Public Works Board

$4.7B rated debt including full $200M commercial paper issuance

New York, September 20, 2013 –

Moody’s Rating

Issue: Lease Revenue Bonds (Trustees of the California State University) 2013 Series H (Various California State University Projects); Rating: Aa3; Sale Amount: $171,375,000; Expected Sale Date: 10-01-2013; Rating Description: Lease Rental: Appropriation

Opinion

Moody’s has assigned a Aa3 rating to California State University’s $171.4 million Lease Revenue Bonds, 2013 Series H. The Aa3 rating reflects the lease structure of the bonds and is notched off of the system’s Aa2 rating on its Systemwide Revenue Bonds, which reflects its strong market position as the nation’s single largest four-year higher education system, ample liquidity and ability to work through the recent substantial state funding cuts, offset by the continued high reliance on the A1-rated State of California and moderately high balance sheet leverage.

SUMMARY RATINGS RATIONALE: The Aa2 rating and stable outlook for the Systemwide Revenue Bonds of California State University (the “trustees”, the “system” or “the CSU”) reflects its strong market position and student demand as the nation’s single largest four-year higher education system, ample unrestricted balance sheet liquidity and its ability to weather substantial state funding reductions through significant tuition increases and launching expense management initiatives. Other strengths are anticipation that the state will continue to show improving economic and revenue trends, as well as an expectation of moderation of the system’s debt issuance. Offsetting the strengths are continued material reliance on state appropriations from State of California (rated A1, stable) for operating support and moderately high balance sheet leverage relative to comparably rated large systems or universities.

The Aa3 rating for the lease revenue bonds issued by the State Public Works Board for the benefit of the CSU incorporates the strength of the system’s pledge to make rental payments and the historical practice of the State of California to include funds for payment in its annual budget for the system. The state’s involvement in these transactions and its history of including funds for payment of debt service as a line item appropriation in its budget add an additional degree of credit strength. However, as the lease structure of the bonds is weaker than the CSU’s Systemwide Revenue Bonds, the obligations are rated Aa3, or one notch below the Systemwide Revenue Bonds’ Aa2 rating.

STRENGTHS:

*The system’s key credit strength is the strong student demand driven by the system’s 23 campuses located throughout the state, as well as its established access mission, with enrollment of over 370,000 full-time equivalent (FTE) students for fall 2012.

*Rising student-related revenues provide a buffer against declining state funding.

*Balance sheet resources are ample, with $3.80 billion of total financial resources for FY 2012 and unrestricted monthly liquidity of $2.85 billion.

*The CSU has strong central financial and budget oversight producing favorable operating cash flow to manage through substantial state funding cuts, including implementing fee increases, enrollment caps and expense management initiatives as needed.

*The system demonstrates active system central governance and oversight, coupled with increased operating independence, including a centralized debt management function and capital needs assessment, ability to retain and invest student fee revenues and autonomy in setting tuition and fees.

CHALLENGES:

*The CSU has endured through a history of deep state funding cuts through FY 2012 totaling nearly $970 million or 31% from FY 2008 to FY 2013, with still significant reliance on state funding for operations at 30% of FY 2012 total revenues.

*Balance sheet leverage rose substantially in recent years from debt issuance, with expendable resources to pro-forma debt (including full commercial paper issuance of $200 million) of 0.57 times and pro-forma debt-to-revenues of 0.76 times (including the State Public Works Board bonds for which the state provides debt service payments in its appropriations).

*Future debt issuance is expected to fund continuing capital needs requiring sustained pledged revenue growth to support increasing debt service.

OUTLOOK

The stable outlook for The California State University is based on expectations of continued exceptional student demand, well-managed operations producing favorable cash flow providing ample debt service coverage and the ability to manage through constrained or reduced state support, and maintenance of ample unrestricted balance sheet liquidity. Also factored into the outlook is the anticipation of the state reporting continued trend improvement in economic and revenue indicators.

WHAT COULD MAKE THE RATING GO UP

An upgrade of the Systemwide Revenue Bonds to an Aa1 is currently not likely in the near to medium term given the state’s A1 GO rating. Any upgrade could be driven by substantial growth of financial resources and unrestricted liquidity that results in a greater cushion supporting debt; sustained improvement in philanthropic support; consistently positive operating performance and strong operating cash flow; ability to continue to grow net tuition revenues with no negative impact on student demand; upgrade of State of California GO rating.

WHAT COULD MAKE THE RATING GO DOWN

A downgrade could be driven by a weakened student market position from either declining enrollment or failure to grow net tuition revenues; liquidity decline from operating losses; state funding cuts or payment deferrals; inability to increase student tuition and fee revenues or implement expense control initiatives to offset state funding cuts, resulting in weakened operating cash flow and debt service coverage; downgrade of State of California GO rating; additional borrowing without compensating resource and revenue growth

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. An additional methodology used in rating the State Public Works Board Bonds was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

Diane F. Viacava
VP – Senior Credit Officer
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

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