Shut Down Without a Fight

Troubled colleges closing proactively rather than running themselves off a cliff may be a good development for investors in public debt, a top ratings agency says.

March 11, 2015

It would be a good development for some investors if troubled private colleges decide to merge or do "proactive closures" rather than go down in penniless flames, Moody’s Investors Service said yesterday.

The ratings agency took a look at the abrupt shutdown planned by Sweet Briar College, which announced last week it will close later this year even though it has about $85 million socked away in an endowment. Moody’s contrasted Sweet Briar with failing colleges that “choose to operate as long as possible before announcing a closure, spending all available reserves, relying on extraordinary gifts for operations and limiting bondholder recovery.”

If a college fights to the bitter end to stay open, bondholders might find the only way to get their money back is by selling off parts of the campus. The likelihood that the sales will net a good return is considered dubious, because private college campuses have specialized assets that may be of limited use to other buyers and sometimes are in rural areas.

What made the Sweet Briar announcement so shocking is that, at least on paper, it appeared the college could stay open a few more years and try out a few more things before shutting down.

“Anecdotally, this was a new twist,” said Eva Bogaty, a senior analyst at Moody’s who wrote the analysis of the Sweet Briar situation. “That is why we felt it was important to cover this, because it felt like it was a new twist to the story, where they identified early on, ‘Hey this is not financially sustainable for us, and we’re going to get out while we still have resources and it’s not a feeding frenzy.’”

On the other hand, Matt Hamill, senior vice president at the National Association of College and University Business Officers, said he is not sure that many private college officials are thinking like the Sweet Briar board.

“To think there is kind of a precipitous closure lurking out there is just not how governing bodies think about their college,” he said. “And the Sweet Briar announcement, the reason it was so surprising proves that point.”

Alumnae of Sweet Briar, a women’s college in rural Virginia, have promised not to let the college close without a fight. Some alumnae are planning, they say, a legal strategy.

Beyond Sweet Briar, Moody’s noted that Iowa-based AIB College of Business also decided to close and give its campus to the University of Iowa next year. AIB's leaders decided that made more sense than going into a death spiral of higher tuition for students and new debt for the college itself.

Moody's also cited several recent mergers, each involving at least one niche school, such as a stand-alone professional school or a faith-based institution: Salem State University and Montserrat College of Art; Hamline University School of Law and William Mitchell College of Law; Clarkson University and Union Graduate College; Arizona State University and Thunderbird School of Global Management; and Tennessee Temple University and Piedmont International University, which are both Christian colleges.

"Merged entities can benefit from increased enrollment, size and programmatic diversity, but they simultaneously face risks as they address the structural financial challenges that contributed to the merger," Moody's said.

Not all of the colleges are rated by Moody’s, which tends to be asked to rate bonds issued by colleges that may be relatively healthy compared to unrated institutions. According to Moody’s, it rates about 80 private colleges with operating revenue of less than $100 million. Last year, one-third of those colleges operated at a deficit. 


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