Fitch Downgrades Joliet Jr College IL Hsg Bonds; Rtg Watch Neg.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 1, 2003

Fitch Ratings downgrades to 'BB' from 'BBB-' its rating of Will County, IL's $14,455,000 student housing revenue bonds (Joliet Junior College (JJC) Project), series 2002A and taxable series 2002B. The bonds also are placed on Rating Watch Negative, indicating the possibility of further downgrade in the coming months depending on occupancy and budget performance of the 296-bed housing facility, Centennial Commons, that opened in Aug. 2002. 'BB' category ratings are not investment grade, and they indicate both the possibility of developing credit risk and the fact that business or financial alternatives may be available to allow financial commitments to be met. Neither JJC nor its fundraising foundation are required to pay the housing facility's debt service.

Project financial margins missed forecasts by huge percentages during the initial year of operations. Rental and related revenues reportedly totaled $953,809, or more than 25% below levels projected in the official statement (OS). Operating expenses reportedly totaled $489,865, nearly double the level projected in the OS. Capitalized interest allowed the project to meet fiscal year 2003 debt service requirements and to accumulate some balances to meet fiscal year 2004 needs. Gross debt service requirements for fiscal 2004, including a Sept. 1, 2003 interest payment, equal $971,050 and will escalate to $1.16 million through 2010. Project officials report the possibility that portions of the bond-financed debt service reserve fund (DSRF) will be used to make the Sept. 1 interest payment.

The primary reason for the rating downgrade is the significantly increased expense load for the project, relative to projections. The project's 2003-2004 budget indicates that operating expenses, less subordinated management fees, will be more than 25% above OS projections, and this calculation assumes both significant year-to-year spending reductions (such as reductions of unplanned one-time capital-type expenses) and successful appeal of an unprojected $71,000 annual property tax burden. The heftier expense burden constrains significantly the project's long-term ability to generate surplus revenues to fund operating and replacement reserves. Fitch's initial rating assumed that the project would have a stronger ability to generate such surpluses. The tighter cash flows suggest a heightened risk that DSRF funds will be needed on a periodic or regular basis to meet payment requirements. In Fitch's opinion, meeting the 1.2 times (x) rate covenant could be challenging over the medium term for the project.

The secondary reason for the rating downgrade is the project's weak occupancy track record to date. Higher-than-expected payment delinquencies, vacancies, and evictions caused last year's poor revenue performance. In addition to snow removal costs, security and surveillance expenses contributed to budget variances, as project officials responded to several incidents caused by disruptive residents and visitors. Initial occupancy of about 95%, which allowed release of bond funds to repay an interim construction loan, dwindled to 78% by year-end. The fiscal 2004 project budget assumes that rental and related revenue will grow more than 60%, with a part of this increase attributable to about 1.5 months of extra revenue in this, the project's first 12-month fiscal year. Academic year occupancy is projected to be at 99% in this budget. The marketing plan targets 95% leasing of the project by Aug. 15, 2003; as of July 25, 2003, management reported that applications and signed leases for 78% of beds were in hand. Rents are being increased between 3.2% and 6.5%, depending on the unit type. Criminal and guarantor credit checks are being implemented to reduce receivables, and authorizations to direct some student aid checks of residents directly to the project have now been put in place after a delay. These latter actions are positive, in Fitch's opinion, but the ability to meet or exceed the revenue budget for fiscal 2004 seems doubtful, particularly if the project's history leads to negative perceptions by parents or students. These factors also contribute to the tighter cash flow outlook and the lower rating.

The Rating Watch reflects the possibility that the bonds will be downgraded further in the coming months if revenue, occupancy, and/or expenditure forecasts are weaker than now budgeted. Between now and Oct. 2003, any of the following factors could contribute to a further downgrade: a) failure to achieve 95% or greater initial occupancy for fall 2003, b) any significant negative adjustment to the project's fiscal 2004 budget, c) loss of the property tax appeal, or d) a significant draw on the DSRF to meet Sept. 2003 debt service requirements. According to the bond indenture, a continuing default under the loan agreement (which includes the rate covenant) is an indenture default, allowing registered owners of a majority of outstanding bonds to accelerate bond payments.

Strengths of the credit continue to be JJC's healthy enrollment profile, limited direct competition due in part to development restrictions, and the expertise of Century Campus Housing Management, one of the student housing industry's market leaders.

Pursuant to a continuing disclosure agreement, Foundation Housing, L.L.C., the project owner, has agreed to provide income, balance sheet, occupancy, and other data on a quarterly basis to national repositories and any bondholder, upon written request.