Approximately $36 million of debt securities affected
Moody’s has downgraded to Caa3 from Caa2 the ratings assigned to Provident Group senior secured obligations, including the senior secured revenue bonds following a payment default on the May 1, 2023 debt service payment. The bonds were initially issued by Arizona Industrial Development Authority, AZ.
RATING RATIONALE
The downgrade to Caa3 reflects a default due to only a partial payment of scheduled debt service on May 1. The borrower owed $1.222 million of scheduled debt service, consisting of $892,475 of interest and $330,000 of principal. The trustee will make a partial payment of $848,778, applied entirely to the interest payment. On April 20, the successor trustee for the senior bonds disclosed that it would not follow the supplemental indenture authorizing the use of the Capital Improvement Fund for debt service; sufficient funds were on hand when including this source, but without it, there was a shortfall.
We expect below sum sufficient debt service coverage over the next 12 months, as cash flow remains pressured by 1) lower revenues driven by declining enrollment and a large share of students taking classes online and 2) liquidity that was eroded by a significant reduction in activity during the COVID-19 pandemic. We also do not currently anticipate any extraordinary support from the sponsor or the university.
The Caa3 rating reflects the project’s significant longer-term challenges, with weakened revenue-generating potential given material and ongoing enrollment declines and a high share of students taking courses online versus on-campus. The project’s ability to grow revenues to meet expenses and rebuild reserves will be challenged by weak in-state demographics, the university’s modest market position for attracting new enrollment and a more extensive hybrid course offering than existed pre-COVID. That said, enrollment declines at the university could stabilize, the project remains well positioned to serve parking demand at the campus, and the concession runs for 30 more years, all of which could support longer-term revenue prospects. The concessionaire has filed litigation against the university alleging various breaches and seeking nearly $11 million in damages; depending on the ultimate resolution, this could entail additional financial support.
The project remains exposed to uncertain actions or exercise of remedies by the senior trustee following the recent payment default, and the University has also filed a notice of default against the project relating to the concession. An uncured concessionaire event of default could lead to termination of the concession, with no required compensation to lenders.
