Minneosta’s largest public university and college system was downgraded this week.

CHICAGO –Minnesota State Colleges and Universities took a one-notch downgrade from Moody's Investors Service to Aa3.

Moody's cited the weakened state of the revenue fund that backs $333 million of debt.

At the lower level, the rating agency shifted the outlook to stable from negative on the revenue fund bonds.

"The downgrade and outlook revision reflect stabilization of revenue fund performance, but at a level that is expected to provide only modest debt service coverage on an ongoing basis from a narrow pledge," Moody's wrote Monday. "Additionally, recent volatility of the fund combined with ongoing enrollment declines adds additional risk."

The MnSCU system's profile benefits from its position as the largest provider of post-secondary education in the Aa1-rated state, as well as the system's size and scale, good financial reserves, and moderate leverage. It operates seven universities and 24 community, technical and comprehensive colleges that enroll nearly 60% of all Minnesota undergraduates. It generated nearly $2 billion in total operating revenue in fiscal 2015.

"The rating additionally incorporates expectations of flat to modest declines in enrollment over the next couple of years," Moody's added. Pledged revenues are projected to provide adequate coverage.

MnSCU's revenue fund bonds are secured by the net revenues and the reserve balance of the MnSCU Revenue Fund which includes revenues from auxiliary operations such as room and board, student activity fees related to campus facilities, student union, and parking.

Total gross pledged revenues of $113.3 million represent 5.8% of MnSCU's overall revenue. Net pledged revenues are just $34.4 million, or 1.8% of MnSCU revenue. Debt service coverage under pledged revenues was 1.3 times in fiscal 2015. Moody's had shifted the outlook to negative ahead of a bond sale last year.

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