Fitch Dwngrs Joliet Jr College, IL Hsg Revs to 'B-'; Rtg Watch Neg.

Business Editors

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

Fitch Ratings downgrades Will County, IL's $14.5 million student housing revenue bonds (Joliet Junior College (JJC) Project), series 2002A and taxable series 2002B, to 'B-' from 'BB'. The bonds remain on Rating Watch Negative, pending review of the JJC housing project's budget adjustments, if any, for fiscal year 2003-2004, and administrative or judicial action on the project's disputed exemption from property taxation. 'B' category ratings indicate highly speculative securities with significant credit risk and a limited margin of safety over the long term.

The bonds' security consists principally of net revenues of the 296-bed Centennial Commons housing facility on JJC's campus, which is owned by Foundation Housing, LLC (LLC) and managed by Century Campus Housing Management, L.P. (Century). Neither JJC nor its fundraising foundation are responsible for debt service.

The downgrade results from fall 2003 occupancy levels lower than those necessary to support previously budgeted expenses. Stringent budget adjustments or additional resource contributions will be necessary to allow the project to be self-supporting, and Fitch believes it will be difficult for the LLC to make those adjustments, given current student demand levels. Further draws on the DSRF seem likely, in Fitch's opinion, and without a substantial change in LLC finances, a further downgrade to the 'CCC' or 'CC' rating category (high default risk or probable default, respectively) is possible in the next several months. Fitch will continue to review information on the project's finances as submitted by the LLC.

Following the weak performance of the project in its initial 2002-2003 occupancy year (described in Fitch's Aug. 1 press release), fall semester move-in began on Aug. 21. As of Sept. 17, occupancy was reported to be 90.2% of the project's beds, which is weaker than the 95% level reported for fall 2002. Previously, Fitch had stated that failure of the project to achieve 95% occupancy for fall 2003 could result in a further downgrade, given the project's weak track record to date and heightened expense burden, relative to initial projections. Initial budget projections for the year developed principally by Century, including a lean expenditure budget, assumed even higher occupancy levels, as of the time of Fitch's Aug. 1 downgrade.

On Sept. 2, 2003, a draw from the DSRF was necessary to cover an interest payment on the bonds. According to a filing by the LLC, approximately $178,000 was withdrawn from the DSRF. The balance remaining after the transfer was approximately $989,000. Gross debt service in this fiscal year will equal approximately $971,000 and will escalate to $1.16 million through 2010. Tough expenditure actions or a changed revenue environment could mitigate reliance on the DSRF for future years, possibly allowing periodic replenishment from cash flow, but the facility's current financial condition creates the likelihood that repeated draws on the DSRF will be necessary over the long term. Such scenarios are consistent with 'B' category (highly speculative) or lower ratings.

The Rating Watch Negative status indicates the possibility of continued downgrade in the near term. Adjustments of the project's 2003-2004 budget now are being considered; aggressive revenue or expenditure assumptions, if adopted, could be a factor in an additional downgrade. In addition, should the LLC continue to be required to pay property taxes, a levy now being disputed in administrative proceedings, additional downgrades are likely as a result of this potentially large fixed cost, which was not projected at the time of bond issuance. In the year ending in September 2003, the LLC paid $71,489 in property taxes. An assessment change for the LLC could increase the property tax burden to more than $190,000 for the year ending Sept. 2004, an unplanned cost equal to more than 12% of revenues. Given the LLC's current financial health, such a large tax burden would likely not be sustainable for more than a year or two before resulting in default. A filing by the LLC states that it is unknown when or whether the property tax appeal will be successful.