S&P Global Ratings has affirmed and placed on CreditWatch with negative implications its 'A' long-term rating on Illinois State University Board of Trustees' series 2016 auxiliary facilities system (AFS) revenue bonds. In addition, we affirmed our 'A' long-term rating and underlying rating (SPUR) on existing bonds and certificates of participation (COPs), issued on behalf of Illinois State University (ISU).
"The CreditWatch Negative status reflects our belief that the state may fail to pass a fiscal 2017 budget by the end of May, which would likely result in zero operating appropriations distributed to the university for the entirety of fiscal 2017," said S&P Global Ratings credit analyst Ashley Ramchandani. We understand that to date, the university has not received any additional state appropriations for fiscal 2017 beyond the $38.3 million of stop-gap funding that was approved on June 30, 2016, and that receipt of such appropriations is contingent on the passage of a state budget.
"ISU's lack of state funding for fiscal 2017 beyond what was approved on June 30, 2016, has inhibited the university's revenue base, in our view, as approximately 30% of its annual unrestricted revenue was derived from state appropriations in fiscal 2016," said Ms. Ramchandani.
The rating reflects our criteria and application of the supporting government cap to the stand-alone credit profile (SACP), limiting the rating to three notches above the state rating; as such, the university's final long-term rating is 'A'.
We currently rate the state of Illinois 'BBB' with a negative outlook. The CreditWatch Negative status on ISU reflects our view of the university's, dependence on state appropriations to support operations. Specifically, the CreditWatch with negative implications reflects the effects of the state of Illinois' ongoing severe budgetary challenges, as demonstrated by its nearly two-year-long budget impasse, on ISU's financial position.
"The CreditWatch Negative status reflects our view of the potential for negative rating action on the university if no further state operating appropriations are received for the remainder of fiscal 2017," said Ms. Ramchandani.
We will reassess the rating and outlook as new information becomes available and expect to resolve the CreditWatch status over the next 90 days.
"We could consider additional negative rating action, including a multinotch downgrade during the CreditWatch period, if we lower our rating on the state," added Ms. Ramchandani. We believe that ISU has sufficiently demonstrated its capacity to operate as a fairly independent enterprise in a competitive
market, a lack of precedent in terms of government intervention or control, and favorable reserves that would allow it to continue to pay debt service in the case of a significant delay or reduction in state appropriations. As such, the ISU rating remains three notches above that of the state.
The 'A' rating reflects our view of ISU's enterprise profile, which we assessed as strong, characterized by improving enrollment and a respectable demand profile with improved matriculation and stable retention for the rating. We also assessed ISU's financial profile as very strong, with ample
balance-sheet metrics and weakening operating performance on a full-accrual basis due to of historical enrollment declines and the challenging state funding environment. Combined, we believe these credit factors lead to an indicative SACP of 'a+.' In our opinion, the 'A' rating reflects ISU's weakened financial profile and performance compared with medians and peers and relatively low debt burden.