Moody's Investors Service has affirmed Valdosta State University's A1 lease revenue rating on the various series of debt. VSU is a component unit of the Board of Regents of the University System of Georgia. The rating outlook remains stable.

SUMMARY RATING RATIONALE

The A1 rating incorporates the strong implied support from the Board of Regents of the University System of Georgia (lease revenue debt rated Aa3), which provides a broad revenue pledge for the bonds through annually renewable rental payments and also reflects the university's stable market position as one of two designated regional universities in Georgia, a state with healthy demographics of high school graduates and breakeven to favorable operating performance with healthy cash flow margins. Offsetting factors include a challenging state funding environment, highly leveraged balance sheet, and risks associated with variable rate demand debt heightened by insufficient monthly liquidity to cover demand debt and swap exposure.

STRENGTHS

*Broad revenue pledge for the bonds from the Board of Regents of the University System of Georgia through annually renewable rental payments. Security for the bonds are therefore not limited solely to the university's or project's revenues.

*Stronger cash flow margins in recent years (17.7% in FY 2011) with expectations of similar performance in FY 2012, driven by solid growth of net tuition revenue and expense containment, provides healthy debt service coverage of about 3 times.

*Growing expendable financial resource base, albeit modest on an absolute basis, up significantly to $34.7 million in FY 2011 from $8.5 million in FY 2009 and unrestricted resources represent a high 80% of expendable financial resources, which provides some additional financial flexibility.

*Support from the Board of Regents made evident by their approval for the university's projects, as well as the strategic importance of the housing, parking, and other student facility projects to Valdosta's market position.

*Increasing diversification of programs has aided enrollment growth, evidenced by a 16% increase in FTE enrollment over the past five years, primarily attributed to new graduate programs.

CHALLENGES

*Challenging state funding environment with fluctuating state appropriations that have been cut over several years and cuts made to state tuition assistance programs. While the BOR's FY 2013 budget contemplates an increase over the prior year, total state operating support will still not regain to FY 2008 levels.

*Risks associated with variable rate demand debt and swap, heightened given thin monthly liquidity of about $26 million, covering $31 million of demand debt by only 84%. While the demand debt is a privately placed bank agreement and is not subject to weekly remarketing risk, the risk of this structure will increase as the expiration date approaches, which is January 2, 2015.

*Leveraged balance sheet, with FY 2011 expendable financial resources of $34.7 million in FY 2011 cushioning debt and operations each at 0.2 times.

*Relatively far distance from Atlanta, Georgia the fastest growing region for high school graduates in the state, coupled with increased price sensitivity of families present challenges with recent pressure on undergraduate enrollment growth. However, fall 2012's decline in undergraduate enrollment is in part due to an increase in admissions standards.

*Rather significant reliance on the federal government for tuition assistance through the Pell grant program, comprising 35% of net tuition and fees in FY 2011 could pressure revenue and/or enrollment growth longer term due to changes limiting eligibility and availability of the funding.

*Board's rental payments are annually renewable with no legal obligation to renew.

OUTLOOK

The stable outlook based on the university's stable market position and increases in enrollment with solid net tuition revenue growth and good operating performance with healthy cash flows. The stable outlook also incorporates the Board of Regent's support for the approved projects and the general financial strength of the BOR.

WHAT COULD MAKE THE RATING GO UP

Improvement in the Board of Regent's general credit profile combined with significant growth of the university's financial resource base and an increase in unrestricted reserves to support demand debt; continued enrollment growth; diversification of revenues

WHAT COULD MAKE THE RATING GO DOWN

Any indication by the Board of Regents of lack of willingness to renew leases, or to aid the resolution of the expiration date (January 2, 2015) on the bank agreement supporting the Series 2008 bonds; or failure to meet financial projections of projects; significant reductions in state support; failure to meet required bond covenants, resulting in acceleration of debt; sustained operating deficits as calculated by Moody's; decline in financial resources; sustained pressure on enrollment