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Rating Action: Moody's revises University of Southern California's (CA) outlook to negative; assigns Aa1 to revenue bondsGlobal Credit Research - 26 Mar 2021New York, March 26, 2021 -- Moody's Investors Service has revised University of Southern California's outlook to negative from stable and assigned an Aa1 to the proposed $400 million of Taxable Bonds, Series 2021A. The bonds will mature in 2051. Moody's has also affirmed the Aa1 ratings on approximately $2 billion of outstanding revenue bonds.RATINGS RATIONALEThe revision of the outlook to negative reflects the University of Southern California's (USC) material financial exposure stemming from legal issues related to sexual assault by a former university physician, resulting in potential balance sheet strength erosion. A recently announced $852 million settlement with 710 plaintiffs in state court cases follows a $215 million federal class action settlement. The federal class action settlement of $215 million was paid in its entirety in fiscal 2021, while no payments have yet been made to the 710 plaintiffs in the state cases. While the university expects the settlement to resolve all of the remaining claims by form Tyndall patients, additional financial and reputational exposure lingers. Moody's considers this exposure a social risk under its ESG framework. Board and administrative changes, with new policies and oversight, will continue to strengthen governance over time. As of June 30, 2020 the university had over $3 billion of unrestricted monthly liquidity, which partially mitigates the financial exposure. Pre-litigation and pandemic cash flow of between $500 million and $600 million also provides a cushion as USC resolves its legal matters.The assignment and affirmation of University of Southern California's (USC) Aa1 ratings reflects its still excellent strategic position, with its large and strong student market and research enterprise, growing academic medical center and exceptional fundraising. Wealth levels continue to grow, with gift revenue averaging nearly $500 million annually following a successful $7 billion campaign. Additionally reflected in USC's rating is its moderately high leverage, growing healthcare operations that are currently performing well but have differing business risks, and a debt portfolio comprised of large bullet or deferred principal structures.Also incorporated into the Aa1 rating is variability in USC's operating performance over the last few years as it absorbs expenses related to legal matters and the impact of the coronavirus pandemic. Following fiscal 2019 operating performance, when the university recorded a large expense related to legal matters, fiscal 2020 reflected year-over-year improvement, but is softer than historical results as the university absorbed pandemic related revenue and expense impacts as well as expenses related to legal matters. Management expects fiscal 2021 to reflect similar pandemic related revenue softness and ongoing expenses associated with legal matters, with potential for improvement in fiscal 2022.RATING OUTLOOKThe negative outlook reflects Moody's expectations that recently resolved legal issues could have a material impact on the financial and reputational strengths of the university, weakening its wealth and leverage profiles relative to peers if not offset with ongoing cash flow and wealth growth.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Substantial growth in total wealth beyond Aa1 peers- Material improvement in unrestricted liquidity relative to operations- Further strengthening of strategic position, including evidenced improvement to governance and management and the university's academic and health care competitive profilesFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Materially larger than anticipated financial impact of unanticipated legal matters or evidence of reputational deterioration, such as weakening of student demand or loss of philanthropic support- Substantial additional debt issuance, particularly without growth in balance sheet reserves- Sustained weakening of health care operationsLEGAL SECURITYThe university's bonds are an unsecured general obligation.USE OF PROCEEDSThe University will use the proceeds of the Bonds for its general corporate purposes, including strategic capital investments, and to pay costs of issuance.PROFILEUniversity of Southern California, founded in 1880, is a large, private research university located in Los Angeles. With enrollment approaching 50,000 headcount, it is the largest private university in California and one of the nation's largest. It has a vast operating scale, generating $5.6 billion in revenue for fiscal 2020, and an extensive research enterprise with over $1 billion of sponsored research grants and contracts in fiscal 2020. USC also operates an integrated health care system that generated over $2 billion in revenues for fiscal 2020 (included in $5.6 billion total operating revenue).METHODOLOGYThe principal methodology used in these ratings was Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Michael Osborn Lead Analyst Higher Education Moody's Investors Service, Inc. 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