Higher ed sector experiencing record impairments: MMA

Municipal Market Analytics reported a record number of higher education impairments have been added to its Default Trends database this year as colleges and universities struggle with lower enrollment and increased operating costs.

MMA added 14 colleges or universitiesto its database, besting a previous record of eight in 2009. The $1.06 billion impaired so far is also a record in its 14-year history, eclipsing the previous full-year record of $570 million in 2015, according to MMA’s Default Trends.

The data indicates that 2023 could be “the potential start of a long-feared trend toward more higher ed impairments and, possibly, defaults,” MMA Managing Director Lisa Washburn wrote in the firm’s weekly Outlook report.

Washburn said the data on this academic year’s fall enrollment also “suggests that elevated mergers and closures are unlikely to abate in the near to medium term.”

The National Student Clearinghouse Research Center released a report Thursday that said this fall’s freshman enrollment in private non-profit colleges was down 4.0%, enrollment in public colleges was down 6.1%, and full-time enrollment in bachelor’s granting programs was down 6.2%, all from a year earlier.

“Fewer tuition paying students locked in for the next several years, higher operating costs (including, but not limited to, labor), a need for significant capital investment to compete, and higher interest rates and tightened credit conditions will reasonably hit operating margins, leading to more sector consolidation (e.g., fewer schools),” Washburn said.

While enrollment in undergraduate certificate programs was up, this will not bring in as much money in the short-term or long term as enrollment in bachelor’s degree programs.

The challenges show the higher education landscape remains “bifurcated,” said Fitch Senior Directors Emily Wadhwani and Sarah Repucci.

Institutions with weak brands located in markets with significant drops in college-age population are vulnerable to enrollment declines.

While higher education balance sheets are generally better than pre-pandemic, S&P Global Ratings Senior Director Jessica Wood said “operating costs continue to rise, pressuring cash flows and capital spending.”

“Flagship state universities” should be “fine,” said Joseph Krist, publisher of MuniCredit News. They become “more attractive everyday cost-wise.” Established private universities with large endowments and strong demand are also likely to manage the challenges.

However, in a continuing trend since the onset of the COVID-19 pandemic, small, specialized colleges are likely to face declining demand, particularly with a “demographic cliff” affecting them, Krist noted.

Overall undergraduate enrollment declined 7.7% in 2023 compared to the total in 2019, according to Moody’s Investors Service. However, a more significant demographic cliff in high school graduates will run from 2026 to 2037, Moody’s analysts said in a report released Oct. 18.

Howard Cure, Evercore director of municipal bond research, said given the United States’ strong economy, high school graduates are having an easy time getting jobs, lowering the inducement to seek a college degree.

This has hit several smaller liberal arts colleges. Some of the closings have taken place recently or are anticipated to happen soon. Cabrini University of Pennsylvania is expected to close in June, Alliance University of New York is scheduled to close in December, New York’s Medaille University closed of New York in August, and The University of the Sciences of Pennsylvania ceased in June 2022.

Wadhwani and Repucci noted that more closures, mergers, and restructured operations are inevitable at weak, narrowly focused and/or small institutions.

“Meaningful and persistent declines in student fee revenues, usually the result of unexpected enrollment drops, are common precursors to consolidation or closure,” they said

The ratings agencies’ outlooks for higher education are negative for Moody’s Investors Service, mixed for S&P Global Ratings, and deteriorating for Fitch Ratings.

Washburn said that rating trends “will not likely be fully reflective of the sector strain” because institutions that borrow in the public debt market, and the rated portion particularly, tend to be larger and/or more fiscally sound.

“This means that much of the fiscal deterioration that results in a decision to merge or close will likely take place outside of the rated universe,” Washburn continued. “To this point, of the 66 non-insured higher education issuers in MMA’s Default and Impairment Database, only eight had a rating above the BBB category at the time of issuance and of the 17 defaulters, four were rated in the BBB category or below at issuance and 13 were unrated.

Only about a quarter, about 1,000, of the institutions in the higher education sector have publicly issued debt outstanding and of the sector’s approximate $230 billion of debt, about half comes from the top 25 borrowers, Washburn said.

“In terms of ratings, about 70% of borrowers fall into the AAA-A category, [the] BBB category and below account for ~20%, and around 10% lack ratings,” she said.

Given the challenged enrollment trends, “the better situated institutions (more competitive, strong brand) are positioned to maintain (or grow in some cases) enrollment (and fiscal stability) by pulling students from weaker positioned schools,” Washburn said.