S&P Global Ratings lowered its long-term rating and underlying rating (SPUR) three notches to 'BB' from 'BBB' on Southern Illinois University Board of Trustees' housing and auxiliary facilities system (HAFS) revenue bonds and certificates of participation (COPs), issued for Southern Illinois University (SIU), and placed the ratings on CreditWatch with negative implications. We view both the HAFS and the COPs bond security pledge as equivalent to an unlimited student-fee pledge, and therefore we rate both the same.
"The downgrade and CreditWatch negative status reflect our belief that the state may fail to pass a fiscal 2017 budget by the end of May, which would likely result in no additional operating appropriations distributed to the university for the remainder of fiscal 2017," said S&P Global Ratings credit analyst Jamie Seman.
We understand the university has not received any additional state appropriations for fiscal 2017 beyond the $106.9 million of stopgap funding that was approved on the last day of fiscal 2016. We further understand that should the state legislature fail to pass a budget via a simple majority vote by May 31, 2017, a supermajority vote will be required to pass a budget by fiscal year-end, making the likelihood of such passage more remote. In fiscal 2016, Illinois' public universities received only a fraction of historical operating appropriations (not including state on-behalf payments), which placed significant liquidity stress on these institutions. SIU's lack of state funding for fiscal 2017 beyond what was approved on June 30, 2016, has also constrained the university's revenue base, as approximately 34% of the university's annual unrestricted revenue was derived from state appropriations in fiscal 2016. We believe that the continued lack of state funding would further stress the university's liquidity and credit profile.
The rating actions on SIU's bonds also reflect our view of SIU's operating deficit, pressured balance sheet metrics, and dependence on state appropriations to support operations. Specifically, the downgrade reflects the effects of the state of Illinois' ongoing severe budgetary challenges, as demonstrated by its nearly two-year-long budget impasse, on SIU's financial position. The CreditWatch with negative implications placement reflects our view of the potential for negative rating actions on the university if no further state operating appropriations are received for the remainder half of fiscal 2017. This is likely to severely strain SIU's liquidity position and contribute to significant full-accrual operating deficits and substantially weakened available resources in the near term. If state operating appropriations are received in fiscal 2017, we will incorporate the impact of those appropriations at that time. We expect that the university will continue to manage its operations and cash flows during this challenging and uncertain state operating appropriation environment. During our two-year outlook period, we expect that the university's enrollment will be pressured and its operations will be, at a minimum, positive on a cash basis and that the university will maintain a manageable debt burden and available resource ratios consistent with the rating category.
We assessed SIU's enterprise profile as adequate, characterized by its programmatic diversity and relatively large enrollment size compared with those of similarly rated peers and rating category medians. This is offset by a full time equivalent enrollment decrease of 4.6% in fall 2016 with additional modest decreases expected in fall 2017, which management attributes to the uncertain state funding environment and negative publicity garnered by Illinois public universities. We assessed SIU's financial profile as adequate, with a solid endowment size for the rating category, highly liquid investments, and relatively low debt burden. Combined, we believe these credit factors lead to an indicative standalone credit profile of 'bbb-', and final rating of 'BB'. In our opinion, the 'BB' rating on the university's bonds better reflects SIU's vulnerability due to business and event risk associated with the state's failure to provide funding support, given the school's reliance on state funds to support operations and our expectation that balance sheet ratios will continue to decline as the school navigates its current operating environment.