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Regional Publics, Small Privates Most Likely to Face Financial Challenges

May 14, 2020
 
 

About four in 10 colleges and universities whose debt Moody’s Investors Service rates are positioned well financially during the coronavirus crisis, one in 10 are heavily exposed to challenges and the remaining half face differing degrees of stress.

That’s according to a new report the ratings agency released assessing credit risks for its U.S. higher education portfolio. Moody’s evaluation assumed a base case of colleges and universities resuming classes in the fall while facing various degrees of declining enrollment, diminished endowment income, falling state funding and lower philanthropic income. Risk would increase if campuses are closed in the fall, the report said.

The good news for investors is that colleges and universities that have issued the vast majority of debt in the sector are the same ones poised to stand up under coronavirus-related operational shocks. About 70 percent of private university debt and 85 percent of public university debt has been issued by institutions in Moody’s top two ratings categories. Generally speaking, they enjoy nationally recognized brands, broad market reach and strong management teams engaged in contingency or scenario planning.

Another 10 percent of the colleges and universities Moody’s rates face “more material credit risks” because of the pandemic, the ratings agency found. They have issued less than 3 percent of the debt Moody’s counts in the sector. Such colleges experience weak student demand even as they rely heavily on student-related revenue like tuition and fees. They also post thin operating margins and have little liquidity. They are often small private colleges or regional public universities in states where the number of high school graduates is expected to decline.

“Even assuming fall 2020 operations return to near-normal, colleges and universities already facing competitive challenges will likely confront greater enrollment volatility and will increase financial aid to bolster enrollment prospects,” the report said. “Issuers with higher proportions of international students are also vulnerable to heightened enrollment declines and resulting revenue drop-offs.”

The remaining half of colleges and universities whose debt Moody’s rates face different levels of exposure to risk amid the pandemic. While many are in a position to keep their credit quality steady amid modest short-term decreases in revenue, they are likely to need to make “difficult decisions around people and programs” to offset declines.

“While the entire sector faces difficult credit conditions, strength of governance and management will be a key determinant of credit quality in the turbulent operating environment,” the Moody’s report said.

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