Moody's Investors Service said it has downgraded to B1 from Baa3 its rating on the revenue bonds of Mountain State University, W.Va., and maintains the rating on review for possible downgrade in conjunction with the withdrawal of its accreditation effective August 27, 2012, from the Higher Learning Commission of the North Central Association.

The rating action affects $5.6 million of rated debt issued through the city of Beckley and the Raleigh County Building Commission.

Moody's review of the credit will focus on the university's appeal of the loss of its accreditation, fall 2012 enrollment, cash balances, and the potential for acceleration of bank debt.

The downgrade the withdrawal of the university's accreditation. While the university plans to appeal the decision and the commission's process provides for that, Moody's believes the HLC decision signals an increased likelihood that the university will ultimately lose its accreditation.

Headquartered in Beckley, Mountain State University is a private, not-for-profit university that had 3,995 full-time equivalent students in fall 2011 across multiple branch campuses, teaching sites and distance learning programs. The university has been highly reliant on student charges (89% of revenue in fiscal 2011) with a history of strong operating cash flow performance.

The loss of accreditation is one of the largest enterprise risks universities face. The loss would be a sharp blow to the Mountain State University business model with the expectation that enrollment would plummet and its students would no longer be able to benefit from federal financial aid programs.

As of fall 2011, 81% of full-time undergraduate received financial aid with the majority of those participating in federal programs. If the appeal process results in the full withdrawal of the accreditation, Moody's notes that university will likely have a better cash cushion than other similarly rated universities.

As of May 31, 2011, cash and investments covered debt by 148%. This cash cushion increases the prospects for timely debt service payments for some period. The university does, however, have bank debt that enjoys a collateralized interest in approximately $11 million of its cash and investments, reducing the amount available for the Series 2004 bonds.

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