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Western Michigan University, MI -- Moody's assigns Aa3 to Western Michigan University's (MI) proposed Series 2021C bonds; outlook is stable

·14 min read

Rating Action: Moody's assigns Aa3 to Western Michigan University's (MI) proposed Series 2021C bonds; outlook is stable

Global Credit Research - 13 Jan 2021

New York, January 13, 2021 -- Moody's Investors Service has assigned a Aa3 to Western Michigan University's (WMU) proposed General Revenue Refunding Bonds, Series 2021C (Tax-Exempt Forward Delivery) with an estimated issuance amount of $34 million. This series will be issued concurrently with previously rated Series 2021A and 2021B bonds. The proposed Series 2021C bonds are expected to be fixed rate and regularly amortizing with a final maturity in 2040. We maintain the Aa3 rating on approximately $330 million of outstanding debt. The outlook is stable.

RATINGS RATIONALE

The assignment of the Aa3 rating is supported by the university's strong fiscal management, sizable wealth and liquid reserves, and solid fundraising. Despite a significant enrollment decline in fall 2020, WMU will produce continued good cash flow in fiscal 2021 driven by swift expense reductions and conservative financial management practices. Strong budget management is a governance consideration under our ESG framework and is a key driver for credit stability. The enrollment drop continues a downward trend driven by weak demographics and high competition in its core service area, exacerbated by effects of the coronavirus pandemic. Both of these are social risks impacting credit. While recent borrowing has heightened WMU's leverage, debt remains currently manageable due to healthy reserves and prospects for sound continued cash flow generation. Other positive credit factors include a large scope of operations with a statewide draw and programmatic diversity, and a limited pension liability. Other offsetting considerations include some revenue concentration and uncertain future state operating support.

RATING OUTLOOK

The stable outlook reflects our expectations that management will continue to take action to adjust expenses to revenue prospects for the foreseeable future. Management has demonstrated an ability to make difficult decisions when necessary, which will likely become ever more critical as the university confronts continuous prospects for slow enrollment erosion due to its market environment.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

- Material strengthening of strategic positioning, reflected primarily in rebounding enrollment and net tuition revenue growth, along with significant growth in financial resources

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

- Weaker operating performance over multiple years with cash flow margins below 10%

- Inability to stabilize enrollment or significant state funding declines, impacting the university's core revenue streams

- Deterioration of balance sheet profile, either through reduction in liquidity or additional borrowing without commensurate growth in reserves and revenue

LEGAL SECURITY

All of WMU's debt, including the proposed bonds, are secured by general revenues, which include tuition, auxiliary system revenue, unrestricted gifts and unrestricted investment income, but exclude state appropriations. Other security features include a rate covenant requiring that general revenues collected during the previous fiscal year were at least 200% of maximum annual debt service for that or any subsequent year. WMU has ample headroom under the covenant, with pro forma MADS coverage of over 13x. There is no debt service reserve fund.

USE OF PROCEEDS

The university has made changes to their planned use of proceeds for the previously rated Series 2021B bonds. Proceeds from the Series 2021C bonds will go towards refunding Series 2011 bonds, and proceeds from the Series 2021B bonds will now go towards refunding Series 2013 bonds in an anticipated issuance amount of $66 million with a final maturity date of 2043. Planned use of proceeds for the previously rated Series 2021A bonds is unchanged.

PROFILE

Western Michigan University is a large, comprehensive university classified as a Research University (high research activity) by the Carnegie Foundation for the Advancement of Teaching. The university was identified as a graduate intensive university by the Michigan Legislature in 1988. The university enrolled 17,242 full-time equivalent students in fall 2020 and operating revenue of $530 million.

METHODOLOGY

The principal methodology used in this rating was Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For 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.

The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 www.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 www.moodys.com.

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.

Jared Brewster Lead Analyst Higher Education Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Susan Fitzgerald Additional Contact Higher Education 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

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