Rutgers U. Downgraded to Aa3 by Moody's

Moody's Investors Service said it has downgraded Rutgers, the State University of New Jersey's general obligation and parity long-term debt to Aa3 from Aa2 and removed the ratings from review for possible downgrade.

Moody's also assigned a Aa3 rating to $878 million of Series 2013 general obligation bonds. The rating action affects $1.7 billion of pro-forma rated debt.

At this time, Moody's has also affirmed the outstanding VMIG 1 and P-1 ratings on variable rate demand bonds and commercial paper. The rating outlook is negative. The ratings are subject to Moody's review of final documents and execution of the transaction as disclosed.

The downgrade and negative outlook are driven by the increased leverage and operating pressure associated with the merger of Rutgers and the majority of University of Medicine and Dentistry of New Jersey (UMDNJ, revenue bonds Baa1 developing), given the combined organization's modest liquidity and limited ability to reduce expenses in the short-term.

The negative outlook incorporates the complexity of the merger of two large organizations and the potential for additional credit pressure if sustained operating deficits erode already thin liquidity or if borrowing exceeds near-term expectations without offsetting revenue and financial resources growth.

The Aa3 rating reflects Rutgers' position as a large, research intensive university. Rutgers is the flagship and land grant university in New Jersey and is slated to join the Big Ten Conference in 2014. Pro forma total cash and investments will grow to $1.7 billion and operating revenues for Fiscal Year (FY) 2012, based on the inclusion of nine out of the 11 operating units of UMDNJ that will join Rutgers will approach $3 billion. Enrollment will increase to approximately 57,000 full-time equivalent students (FTEs) and research expenditures will exceed $500 million.

After the anticipated acquisition of nine out of the 11 operating units of UMDNJ on July 1, 2013, and the $495 million debt related to those units, Rutgers' direct debt will increase by 56% to approximately $1.8 billion, resulting in an elevated pro forma FY 2012 debt-to-operating revenue of 0.62 times and a moderately low expendable financial resources-to-debt of 0.71 times. Secondly, the consolidated university which, on a pro forma basis posted a negative 8.4% operating margin and a mere 0.1% operating cash flow margin in FY 2012, is expected to shoulder additional nonrecurring costs related to the consolidation with limited ability to reduce operating expenses in the short-term resulting in a continuation of slim operations over the next two to three years.

Last, Moody's expects it to be at least two years before the restructuring of the various boards and multiple changes to senior management will effectively harness the synergies of the expanded research capabilities, increase operating efficiencies, and build a more robust philanthropic culture to sustain positive operations and to grow the balance sheet to cushion debt and operations.

Short-term ratings are based on the university maintaining stand-by purchase agreements for variable rate demand bonds and for commercial paper from P-1 rated banks.

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