Article/Intelligence
Distress Infiltrates Entire Credit Lifecycle in High Education Sector; Introducing Reorg’s Proprietary Database on Distressed/Stressed Higher Education Institutions
A dozen school closures in the first six months of 2024 alone evidence the progressive impact of enrollment declines that have plagued the higher education sector this past decade. Now more than ever, universities across the credit spectrum altogether have been experiencing more pronounced distress, say municipal market participants.
Recognizing the market’s need to survey the higher ed landscape and get ahead of school closures, Reorg has compiled a database of 92 schools that are distressed or heading for distress in the near term.
The data, which were collected in the first half of 2024, consist of the amounts of debt outstanding, the most recent credit ratings or rating actions, and locations for the schools that are rated BBB+ or lower. Additionally, Reorg has compiled a shortlist of 27 schools, the majority of which are private institutions, that entails a more in-depth EMMA disclosure cleanse linking to their latest financial results, forbearance notices, consultant reports and covenant breaches, among other notable credit events.
Early Signs in the Primary
The primary market this year has welcomed an abundance of high-yield higher ed deals – the two latest deals priced last week with $183.6 million in aggregate for the Baa3 rated Pace University and the BBB+ rated Maryland Institute College of Art.
Investors have been more reserved toward lower-rated higher education credits in recent years, because schools such as Pace and MICA “have been struggling with enrollment and do not have the same endowment programs as the premiere higher education credits,” said Chris Brigati, director of strategic planning and fixed income research at SWBC Investments. “Liquidity risk remains a concern for investors, as widespread secondary market support can be spotty at times,” he added.
In June, Hawaii Pacific University sold $35 million in BB rated debt to refund its Series 2013 bonds, while earlier in March, the Philadelphia-based La Salle University borrowed $42 million in similarly rated bonds to refund prior debt and finance capital improvements. “Philadelphia in particular is somewhat oversaturated with schools and somewhat under performing in terms of the graduate high school graduate pipeline,” said Emily Wadhwani, sector lead for the higher education and nonprofit group at Fitch Ratings.
Drexel University, which has roughly $1 billion in debt outstanding, was downgraded by Moody’s Investors Service last August to Baa1 from A3, reflecting the school’s material weakening in debt affordability.
This market has been challenged for a while and financial pressures facing La Salle and Drexel are emblematic of a broader issue across schools in the area, said Wadhwani. Particularly in the case of Drexel, however, a driving stressor was that Drexel “took out some debt to a degree that I think was no longer sustainable so they are vulnerable to erosion in their ability to service their obligations,” she added.
Moving Down the Credit Spectrum
In a more unfavorable case for the Greater Philadelphia area, University of the Arts abruptly announced its plans to close in a notice that came merely one week before its official closure on June 7, citing “many years of declining enrollments, declining revenues, and increasing expenses.” In the south, Birmingham Southern College in Birmingham, Ala., told their community similar news in March when the board of trustees voted to shut down the school after failing to secure a $30 million loan via proposals to the Alabama House of Representatives.
For those not heading toward closures, cutting faculty and cutting programs are two of the first possible measures to help reduce their expenses in times of distress, say sources. While enrollment will not “magically increase by 10% year over year,” introducing graduate programs can boost enrollment numbers if they are highly sought fields such as healthcare, engineering and programming, according to a municipal advisor who works with distressed colleges in the Midwest.
Financial advisors do not tend to discourage lower-rated schools from taking on new debt even when there is not a feasibility study done, the advisory source added, but for schools that “are apparently on fire,” they do need to prove that they have sufficient cash flow to make debt service payments.
While downgrades from ratings agencies can help the market identify opportunities for turnaround and restructuring, these ratings actions typically occur when a situation might have already been deteriorating for some time, market sources said.
Take Albion College in Albion, Mich., for example. S&P Global Ratings downgraded Albion’s $48.895 million in Series 2022 bonds issued via the Michigan Finance Authority to BB from BBB on May 16. A week later, the school announced on EMMA that it had entered into a forbearance period ending Jan. 15, 2025, meaning discussions about addressing the school’s financial performance had been happening long before terms of the forbearance agreement were made public.
“The higher education sector and our institution face strong headwinds brought about by decreasing numbers of high school graduates in the state of Michigan and increased competition,” Albion President Wayne Webster told Reorg. “We are doing a lot of work to take our future into our own hands as part of a three-year strategic budget realignment plan, which has already reduced our budget deficit in half in one year,” he added.
In another fast-developing case, that of Rider University, the school hosted a bondholder call on April 23 to inquire about bondholder consent regarding a mortgage amendment associated with the $67 million in Series 2021A and Series 2021B bonds issued via the Public Finance Authority and $41.77 million in Series 2017F bonds issued via the New Jersey Educational Facilities Authority. In early July, Rider said it was seeking consent from successor trustee U.S Bank to amend the loan and mortgage agreements, which would allow the school to take out additional parity debt to resolve some short-term liquidity needs. Rider said in a disclosure on Feb. 9 that it withdrew participation from Moody’s ratings prior to the agency’s downgrade of the institution to Caa1.
Drexel University, Rider University and University of the Arts did not immediately respond to requests for comment.
Some schools choose to ride out the storm by themselves, while others decide to look outward for potential collaborations, and sources said they expect that mergers and acquisitions in the higher ed space would continue to flourish as institutions learn from successful consortiums.
Marymount Manhattan College’s merger with Northeastern University, Villanova University’s acquisition of Cabrini University’s campus and Moravian College’s merger with Lancaster Theology Seminary are examples of such partnerships happening in the Northeast within the past year. In the Midwest, Lewis University merged with Chicago-based St. Augustine College in December 2023. In California, Cal Maritime’s administration is working to merge with the larger Cal Poly San Luis Obispo, while the University of Redlands announced a merger with nearby Woodbury University earlier in January.
On June 5, Reorg hosted a hybrid event discussing distressed trends in higher education with guest speakers from ArentFox Schiff, Wells Fargo, PFM Financial Advisors and BDO USA, P.C. Watch the replay HERE.