Board of Trustees of the Univ. of Alabama -- Moody's affirms University of Alabama in Huntsville's (AL) Aa3; outlook stable

Rating Action: Moody's affirms University of Alabama in Huntsville's (AL) Aa3; outlook stableGlobal Credit Research - 25 Mar 2022New York, March 25, 2022 -- Moody's Investors Service has affirmed the Aa3 issuer and revenue-backed ratings of the University of Alabama in Huntsville (AL). The university had $136 million of outstanding debt as of fiscal year-end 2021. The outlook is stable.RATINGS RATIONALEThe affirmation of the Aa3 issuer rating reflects UAH's established niche as a STEM-focused public university located in the economically vibrant Huntsville area. UAH benefits from its membership in the University of the Alabama System, which provides significant oversight and governance to the university, important given recent turnover in the university's presidency. Research-related activity with the nearby NASA Marshall Space Flight Center and U.S. Army Redstone Arsenal support a sizeable research enterprise comprising 38% of expenses. Improved operating appropriations from the State of Alabama (Aa1 stable), which comprised 19% of total operating revenue in fiscal 2021, and its close ties to the state additionally support the university's credit rating.Offsetting considerations include emerging challenges related to enrollment and rising labor costs. While enrollment was increasing pre-pandemic, it came with rising discounting, moderating revenue growth. It is unclear whether more recent enrollment losses are largely as a result of pandemic related disruptions or reflect more fundamental issues. UAH also has softer EBIDA margins compared to peers, and faces increased costs as it competes for labor. Further, a rising age of plant indicates need for additional investment, which may result in rising leverage over time. The university's significant exposure to a large state pension liability further tempers the rating, demonstrated by total cash and investments to debt of 1.9x, compared to much weaker 0.4x coverage of total adjusted debt.The affirmation of the Aa3 revenue bond ratings incorporates UAH's issuer rating, along with the broad pledge of gross tuition and student fees.RATING OUTLOOKThe stable outlook hinges on Moody's expectations that the university will maintain EBIDA margins above 10% and stabilize enrollment. It also incorporates Moody's expectations that the university will not increase debt over the outlook period.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Significant strengthening of brand and strategic position, evidenced by enrollment and net tuition revenue growth along with rising donor support- Material and sustained improvement in operating performance, with EBIDA margins consistently above 15%- Sizeable increase in total cash and investmentsFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Inability to consistently maintain double-digit EBIDA margins- Failure to stabilize enrollment and grow net tuition revenue- Further turnover of senior management delaying ability to successfully implement strategic initiatives- Decline in unrestricted liquidity or spendable cash and investmentsLEGAL SECURITYUAH's outstanding General Fee Revenue Bonds are payable from a gross pledge of tuition and student fees. General Fees exclude state appropriations, housing, and dining revenue. There is no required debt service reserve fund. Fiscal 2021 pledged revenues of $135 million provide very strong 12.1x coverage on maximum annual debt service of $11.2 million for all general fee bonds.PROFILEThe University of Alabama in Huntsville is one of three campuses that are part of the University of Alabama System. The other two system members are the University of Alabama (Tuscaloosa) and University of Alabama at Birmingham. UAH's curriculum is weighted toward science, technology, engineering and math (STEM) and benefits from research ties with adjacent military and federal space program entities. In fiscal 2021, UAH recorded total adjusted operating revenue of approximately $300 million and enrolled 8,199 full-time equivalent (FTE) students in fall 2021.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. 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