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Birmingham Private Educational Bldg. Auth, AL -- Moody's downgrades Birmingham-Southern College, AL's rating to Caa2 from Caa1; outlook negative

Rating Action: Moody's downgrades Birmingham-Southern College, AL's rating to Caa2 from Caa1; outlook negativeGlobal Credit Research - 18 Jan 2022New York, January 18, 2022 -- Moody's Investors Service has downgraded the issuer rating and debt rating on the Tuition Revenue Bonds of Birmingham-Southern College, AL to Caa2 from Caa1. The rated revenue bonds were issued through the Birmingham Private Educational Building Authority, AL. The outlook remains negative. The college had approximately $33 million of total debt as of May 31, 2021.RATINGS RATIONALEThe downgrade reflects sustained enrollment and revenue declines driving deep operating deficits and extraordinary endowment draws. Prospects for recovery in the event of default are weakening as the university's endowment draws have resulted in a reported $17 million endowment deficiency. Management aims to bolster donor confidence by granting endowed funds an interest in the real property of the college subordinate to the roughly $20 million of bank debt. However, this has prospects of more deeply subordinating the interest of bondholders. Leadership's risk calibration in continuing to make extraordinary endowment draws while pursuing donor support for a related foundation informs our opinion of financial policy and the college's extremely weak ability to fund investments in programs and facilities. This approach to financial policy is a key driver of the rating action under our ESG framework.The pandemic created revenue headwinds partially offset by federal relief funding in fiscal 2020 and fiscal 2021, but relief funding will be much lower in fiscal 2022. Operating revenue fell 8% to $34 million in fiscal 2021 as enrollment declined. A drop in gift revenue compounded the year-over-year revenue challenges. Monthly days cash on hand as of fiscal year end was perilously low at 24 days. The weak operating performance and decline in liquidity also drove covenant violations in the college's bank debt. While the bank syndicate has provided a waiver, the violation points to the weak credit profile of the college. Enrollment declined an additional 7% in fall 2021 to 1,047 full-time equivalent students. Although management aims to increase both its enrollment and net tuition revenue, the college's challenged strategic positioning limits the prospects for material near term gains.BSC leadership aims to raise over $100 million of endowed funds at the separately managed BSC Foundation to support the college's sustainability. Following a prolonged period of declining student revenue and erosion of the college's financial resources, the college's survival is highly dependent on rapidly achieving donor support goals.The downgrade of the tuition revenue bonds incorporates the issuer rating and the enhancement provided by the claim on gross tuition revenue, offset by structural subordination to bank debt and potentially to underwater endowment funds.RATING OUTLOOKThe negative outlook incorporates the trends of declining revenue, weak operating performance and drop in liquidity, with limited prospects for reversal over the outlook period unless the university is able to restore donor confidence and improve philanthropy quickly. The outlook also incorporates the bank debt covenant violation.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Marked and sustained improvement in operating performance- Substantial gain in total cash and investments including unrestricted liquidityFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Inability to materially increase philanthropic support and improve operating performance over the next one to two years- Additional decline in unrestricted liquidity- Substantial increase in financial leverage or acceleration of bank debt- Incremental impairment of recovery value of enterprise assets including real estate and financial resourcesLEGAL SECURITYSecurity on the Tuition Revenue Bonds is provided by a pledge on the college's gross tuition revenues. There is an additional bonds test requiring that recent pledged tuition revenue be at least 300% of prospective Maximum Annual Debt Service. There is no debt service reserve fund requirement.PROFILEBirmingham-Southern College is a private liberal arts college with operating revenue of $34 million in fiscal 2021. Founded in 1856, the college is affiliated with the United Methodist Church. The campus is comprised of 192 acres on the west side of Birmingham.METHODOLOGYThe principal methodology used in these ratings was Higher Education Methodology published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1257002. Alternatively, please see the Rating Methodologies page on www.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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.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 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.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.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 Gephardt Lead Analyst Higher Education Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Florence Zeman Additional Contact Housing 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 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. 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This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. 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