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Arizona Industrial Development Authority, AZ -- Moody's downgrades Provident Group - EMU Properties LLC's senior bonds to B3 and places rating under review

·16 min read

Rating Action: Moody's downgrades Provident Group - EMU Properties LLC's senior bonds to B3 and places rating under reviewGlobal Credit Research - 26 Aug 2022New York, August 26, 2022 -- Moody's Investors Service, ("Moody's") has downgraded the senior secured revenue bond rating of Provident Group – EMU Properties LLC to B3 from Ba3. The rating has also been placed on review for downgrade. The bonds were initially issued by Arizona Industrial Development Authority, AZ which lent the proceeds to Provident Group – EMU Properties LLC.Downgrades:..Issuer: Arizona Industrial Development Authority, AZ....Senior Secured Revenue Bonds, Downgraded to B3 from Ba3; Placed Under Review for further Downgrade..Issuer: Provident Group - EMU Properties LLC....Senior Secured Regular Bond/Debenture, Downgraded to B3 from Ba3; Placed Under Review for further DowngradeOutlook Actions:..Issuer: Provident Group - EMU Properties LLC....Outlook, Changed To Rating Under Review From NegativeRATINGS RATIONALEThe downgrade to B3 reflects continued significant challenges for the project as enrollment is expected to decline again in Fall 2022, which will limit revenue recovery and likely further erode cash on hand. We expect cash flow coverage of debt service will remain very narrow or below sum sufficient over the next 12 months owing to continued weak enrollment levels and parking activity, requiring the use of reserves to cover shortfalls. Liquidity has declined significantly as cash reserves were used to fund debt service shortfalls, and the project is increasingly reliant on 1) a recovery in parking activity to provide revenue to meet expenses and rebuild cash balances or 2) external intervention or other supportive actions from the subordinate note holder or the university (potentially related to concession compensation). However, a robust recovery in cash flow is uncertain as parking revenue is significantly below the pre-COVID trend, and the pace of recovery and ultimate level of revenue going forward will be pressured by challenging in-state demographics and hybrid/on-line offerings. The university continues to use a hybrid online/in-person model that is affecting how students use the campus and purchase parking, and there is a risk that COVID could again disrupt activity in the fall or winter periods. The financial flexibility of the project is significantly constrained and we do not currently anticipate any imminent extraordinary support from the subordinate note holder or the university.The project holds a concession to operate the parking system at the main campus of EMU in Ypsilanti, Michigan. In March 2020, EMU suspended in-person instruction and transitioned to online instruction for the balance of the winter semester (January-April 2020) and cancelled or converted in-person programs to online for the summer semester (May-August 2020). This resulted in a near-total elimination of parking revenue from mid-March until Fall 2020 when the university reopened for the Fall 2020 term. The Fall 2020 semester was delayed by several weeks and continued for two months before in-person instruction was again curtailed, and January-April 2022 semester start was delayed due to COVID. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety that have resulted in severe restrictions on social activities along with the cancellation of on-campus instruction and residential offerings at universities.RATING OUTLOOKThe rating is under review for downgrade. The review will focus on 1) the level of parking revenue realized for Fall 2022 semester, which we expect will become more apparent over the next 1-2 months; 2) the ability of the project to address any identified shortfalls from cash already on hand or external sources; and 3) the evolution of the relationship and potential for resolving disputed issues among key project parties including the university, the subordinate note holder, the senior trustee and the concessionaire. We expect to conclude the review over the next 2-3 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFACTORS THAT COULD LEAD TO AN UPGRADEBefore placing the ratings on review, we had stated:• Strong and sustained recovery in parking demand that restores financial metrics and liquidity to FY 2019 levels.• Equity injection that restores reserves.FACTORS THAT COULD LEAD TO A DOWNGRADEBefore placing the rating on review, we had stated:• If Fall 2022 parking sales will be unchanged from or below Fall 2021 levels and there is an expectation that liquidity will be significantly depleted• Projections following Fall 2022 enrollment show an increasing likelihood that reserves will be insufficient to cover debt service requirementsPROFILEIn January 2018, Eastern Michigan University, MI (EMU) entered into a concession agreement with Preston Hollow Capital, LLC (PHC), concerning the operation, maintenance and improvement of the EMU parking system. Pursuant to an assignment and assumption agreement, PHC has assigned its right, title and interest in and to the concession agreement to Provident Group - EMU Properties LLC ("Provident"), a single-member special purpose entity incorporated in Arizona.Provident Group - EMU Properties LLC is owned by a sole member, Provident Resources Group Inc., a Georgia 501(c)(3) non-profit corporation that is exempt from federal income tax. In exchange for an upfront payment of $55 million, which was paid in April 2018, the concession agreement grants Provident the exclusive and irrevocable right to collect parking fees and to operate and maintain the parking system for a term of 35 years.The parking system consists primarily of surface lots located within a relatively compact, 1.5 square mile area at the main campus of EMU in Ypsilanti, Michigan. Provident has retained LAZ Parking Midwest, LLC, as operator pursuant to an operations and maintenance agreement and LAZ Parking Realty Investors, LLC, as asset manager pursuant to an asset management agreement.The principal methodology used in these ratings was Generic Project Finance Methodology published in January 2022 and available at https://ratings.moodys.com/api/rmc-documents/361401. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.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 issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Moses Kopmar Vice President - Senior Analyst Project Finance Group Moody's Investors Service, Inc. 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