Board of Trustees of Alabama A&M University -- Moody's affirms Alabama A&M University's Baa1 rating; outlook is negative

New York, November 14, 2012 -- Moody's Investors Service has affirmed the Baa1 rating on Alabama A&M University's (AAMU) $56.3 million of outstanding Series 2007 Revenue Refunding and Capital Improvement Bonds. The outlook is negative.

SUMMARY RATING RATIONALE

The Baa1 rating reflects a relatively weak student market position in an increasingly competitive market, very low unrestricted liquidity levels, a challenging state funding environment, weak fundraising, and reduced transparency as a result of delayed audit release. Theses credit challenges are offset by balanced operations despite state funding reductions and enrollment declines, management team stabilization, improved ability and willingness to provide current financial data, coupled with improved financial controls, good coverage of debt by pledged revenues, and currently moderate operating leverage.

The negative outlook reflects the university's significant capital needs which could require a possible $80-$100 million bond issuance in the next 12 to 18 months pending the completion of the university's master facilities plan in October 2013. The outlook also incorporates the university's 8 year trend of declining enrollment.

CHALLENGES

*Highly competitive market and weakened student demand resulting with a significant 16% decline in total full-time equivalent enrollment from fall 2007 to fall 2012.

*Weak liquidity, with FY 2011 unrestricted monthly liquidity of $6.7 million providing 22 days cash on hand. However this is markedly improved from FY 2010 when the university reported just $532,000 of unrestricted monthly liquidity. Management has prioritized improving liquidity and has set a goal to develop a $10 million contingency fund.

*Significant capital needs including approximately $75 million of deferred maintenance, and a new science building with auditorium that the university is contemplating issuing $80 to $100 million of debt to address.

*The university is vulnerable to state budget challenges, with 31% of FY 2011 operating revenue from state appropriations. While AAMU experienced mid-year proration in FYs 2009, 2010, and 2011, the FY 2011 proration was just 3%, and the university did not experience any proration in FY 2012.

*Relatively modest levels of philanthropic support, with gifts to the foundation of just $1.3 million in FY 2011. This was the first year the university's Trust for Educational Excellence campaign no longer received state grants and matching funds as part of a lawsuit agreement which concluded in FY2010, and have accounted for over two-thirds of the annual gifts for the university for the prior ten years.

STRENGTHS

*The university maintains status as Alabama's Land Grant designated Historically Black Colleges and Universities. The university has implemented changes at the admissions office as well as the advisement and retention offices which are expected to help reach the university's enrollment goal of 6,568 students.

*Positive operating performance in spite of state funding and enrollment declines, with three-year (FYs 2009-2011) operating margin of 1.9%, and FY 2011 operating cash flow margin of 9.3%, stronger than prior year.

*Conservative debt structure with all debt in fixed rate mode with decreasing debt service after reaching maximum annual debt service of $5.6 million in FY 2013. The University Foundation's outstanding $16.5 million of debt associated with privatized student housing has been incorporated as direct debt in Moody's calculations.

*Pledged revenues provide good debt service coverage of 6.26 times in FY 2011.

*Manageable operating leveraged balance sheet with direct debt to operating revenue of 0.58 times.

Outlook

The negative outlook reflects the university's significant capital needs which could require a possible $80-$100 million bond issuance in the next 12 to 18 months pending the completion of the university's master facilities plan in October 2013. The outlook also incorporates the university's declining enrollment and thin cushion of cash and investments.

WHAT COULD MAKE THE RATING GO UP

Unlikely given the negative outlook--significant increase in financial resources and liquidity; improved market position; markedly improved operating performance

WHAT COULD MAKE THE RATING GO DOWN

Additional debt issuance absent commensurate growth of financial resources and revenue; continued deterioration of student demand; narrowing of operating performance; declines in financial resources including unrestricted cash

PRINCIPAL RATING METHODOLOGY

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education published in August 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Caitlin Bertha Associate Analyst Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Dennis M. Gephardt Vice President - Senior Analyst Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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