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Bond payment defaults are unlikely in higher education, even as more universities retreat to online and hybrid learning this fall because of the coronavirus and in doing so risk revenue declines from auxiliary services like parking and dormitories, according to Moody’s Investors Service.
Some colleges might miss debt service coverage covenants, the ratings agency said in a new report. But universities can reduce expenses, borrow internally and use reserves to repay debts, or they can refinance to lower payments in the immediate future. Those that have borrowed heavily to pay for auxiliary facilities and that use money generated by those facilities to repay debt are under the most pressure.
Auxiliary revenue from services like student housing and dining halls make up a median 13 percent of operating revenue for the higher education sector. The range is wide within the portfolio of companies Moody’s rates, though, running from less than 5 percent to more than 30 percent.
“While colleges and universities can continue to collect tuition even if students are fully remote, albeit with pressures on pricing, they can only collect auxiliary revenue if students are present to consume services,” said Debra Roane, vice president at Moody’s, in a statement. “Typically, residential colleges or those with large athletic and related parking activities rely the most on these sources of revenue, with dormitory revenues generally dominating.”
An expected “unprecedented reduction in auxiliary revenues” in the current fiscal year means thinner operating cash flow margins and less budget flexibility for many colleges and universities. Credit profiles will weaken for institutions that have done the most borrowing while planning repayments from auxiliary revenue.
Lower debt service coverage could trigger some bond covenants, leading to a technical default but not situations where colleges have defaulted on their loans because they did not pay. Such technical defaults can often lead to colleges being required to bring in a consultant, according to Moody’s. But if instead they accelerate payments on the debt owed, ramifications could be more serious.
“Careful treasury management and knowledge of specific provisions of bond documents are therefore of paramount importance,” the ratings agency’s report said.
