Issue: Refunding Revenue Bonds, Series 2016; Rating: A1; Rating Type: Underlying LT; Sale Amount: $22,070,000; Expected Sale Date: 09/27/2016; Rating Description: Lease Rental: Abatement;

Summary Rating Rationale

Moody's Investors Service has assigned an A1 rating to the Board of Regents of the University System of Georgia's proposed $22 million Refunding Revenue Bonds, Series 2016, to be issued through Savannah Economic Development Authority, GA on behalf of the Board of Regents of the University System of Georgia and its member, Armstrong State University. Moody's maintains Aa3, A1 and A2 ratings on the system's various lease revenue bonds as detailed in the May 2016 Credit Opinion.

The A1 rating primarily reflects the strength of the University System of Georgia, its management and oversight of its component units, and the lease structure used for financing projects. It also incorporates the wealth of the system with healthy reserves, as well as the underlying credit strength of Armstrong State University. While the expected cash flow to support debt service for the ASU Student Union, LLC remains tied to a particular project at Armstrong State University, the system's obligation to make payments under its annually renewable rental agreement, once renewed, is a broad general obligation not limited to any one project or university.

USG is the dominant provider of public higher education in the Aaa-rated State of Georgia. The system's favorable tuition pricing, enrollment growth, and diverse revenue sources will continue to support sound debt service coverage. While financial leverage for some colleges is high, overall financial leverage is manageable and USG's future borrowing plans are limited. Credit challenges include thin unrestricted liquidity relative to a large expense base, growing retirement benefit obligations, and ongoing capital needs. The rating also incorporates the annual renewal and abatement risk associated with the lease obligation supporting the bonds.

Rating Outlook

The stable outlooks for the system and Armstrong State University reflect the expectation that ASU will service its Public Private Venture debt without extraordinary support by the system. It also incorporates USG's ongoing commitment to overseeing and managing the PPV program while maintaining stable operating performance and sizeable financial reserves.

Factors that Could Lead to an Upgrade

Substantial increase in unrestricted liquidity and sustained improvement in operating performance

Material improvement in credit health of various participating colleges

Factors that Could Lead to a Downgrade

Any indication of a lack of willingness to renew rental agreements

Significant reduction in state support or erosion of unrestricted liquidity

Weakened financial performance including decline in debt service coverage

Legal Security

Security on the bonds is provided by rental revenue paid by the Board of Regents under the terms of annually renewable rental agreements on behalf of the various colleges and universities. The Board of Regent's obligation to make rental payments under the annually renewable rental agreements is an unsecured general obligation of the Board, payable from all unrestricted revenue sources.The lease revenue bonds are subject to appropriation and abatement risk. In addition to assessing the relative essentiality of each financed project to the system, Moody's also considers the system's reliance on the PPV program that grew markedly over the 2002 to 2011 decade. With limited ability to enter into multi-year financial commitments, the system remains reliant on PPV financing. It currently has $3.2 billion of PPV-related revenue bonds that predominantly support student life facilities on the various campuses. While the system has no legal obligation to renew any rental agreement, it has clear strategic interests in stewarding the PPV program. Our ratings incorporate the assumption that the system will continue to take extraordinary steps to renew rental agreements, including agreements for projects whose fundamental business conditions may be weak and require additional support from the system.The proposed Series 2016 bonds will not have a debt service reserve fund requirement.