Moody’s Investors Service has upgraded Loyola University Chicago’s rating one level to A2 following the completion of the school’s sale of its health system to Trinity Health on June 30.

The sale of the Loyola University Health System, previously a wholly owned subsidiary of the school, removes a strain on the balance sheet. Loyola had provided operational and liquidity support to avoid a covenant default.

The system retains all of its liabilities, including its debt, swaps, pension, and post-retirement obligations, which all are removed from Loyola’s balance sheet.

“The sale of LUHS removes the health system and enables LUC to fully focus on its own operations and academic programs, including student recruiting and retention, and needed capital projects,” Moody’s wrote. The agency late last week removed the rating from watch list and assigned a stable outlook. The change affects $200 million of outstanding debt.

The A2 rating reflects Loyola’s student market position as a leading Catholic and the only Jesuit university in the Chicago region, as well as favorable tuition revenue growth, liquidity, operating performance, and cash-flow generation.

The school is challenged by an expected rise in debt levels due to the planned issuance of $130 million this year and another $130 million in fiscal 2013 or 2014 to fund an extensive capital program.

Loyola also has committed to covering half of a $150 million medical research building — with Trinity covering the rest — on its medical school campus. The school also faces tough competition from other Chicago-area universities and has just a modest financial-resource cushion.

As part of the sale, Loyola received $80 million of upfront funds and $20 million in escrow that will be released over four years. LUHS will pay academic support payments of $22.5 million per year to LUC for an initial 10-year period.

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