DALLAS - The College of Santa Fe is on the verge of closing and defaulting on $30 million of debt after a year of efforts to save New Mexico's oldest private university.

The Catholic university, founded in 1859 by the Lasallian Christian Brothers, is not registering students for the fall and has cancelled most events. The last hope for keeping the school operating is a potential acquisition by Laureate Education Inc. of Baltimore.

Laureate, which owns and operates an international network of universities, would add College of Santa Fe in the plan under discussion.

Laureate began discussions to acquire Santa Fe a year ago, but had to abandon negotiations because the college's major creditors were unwilling to make the concessions.

"It became obvious that because of their own financial realities and the instability of our global economy, Laureate is not able to assume the debt required to retire our bonds and fund the college," CSF president Stuart Kirk wrote after the talks fell through.

To provide an alternative, Gov. Bill Richardson, Santa Fe Mayor David Coss, and the Santa Fe City Council have intervened. But hope for a solution dimmed in the spring when HB 577, sponsored by state Rep. Lucky Varela, failed to win passage. The bill would have allowed the state to take over operations of the school, making CSF part of the University of New Mexico or Highlands University.

Without a savior, CSF will not be able to make its September debt service payment of $585,000 on Sept. 1. Monthly debt service of $111,473 has been paid from the debt service reserve fund since October 2008. As of February, there was just over $1 million left in the debt service reserve fund.

Standard & Poor's cut its rating for the bonds to C from BB in February. The bonds were issued in 2006 and insured by Radian Asset Insurance, which is rated BBB-minus with a negative outlook by Standard & Poor's. The bonds are not rated by Moody's Investors Service or Fitch Ratings.

"The rating action reflects that the college has only sufficient money to pay debt service from the debt service reserve fund for the next six months," said Standard & Poor's credit analyst Carlotta Mills.

A spokesman for Radian confirmed that his company is taking part in the negotiations over the college's future but declined to comment further.

Proceeds of the 2006 bonds were used to refund all the school's outstanding debt and included $4 million of new money for campus upgrades, including consolidating student administrative functions in a new student services center and improving technology on campus. The bonds were issued in variable-rate mode swapped to fixed rate, with weekly resets.

Enrollment fell by 29% to 1,653 in 2007 from a high in fall 2005 of 2,137. A large portion of the decrease was due to the cessation of federal funding for some online courses.

Prospects for improvement in the college's fortunes are dim. The private college sector is still absorbing the brunt of the recession, with little hope for a turnaround over the next two years, analysts say.

"Moody's anticipates a weakening likely to take place across rating categories, reflecting less tuition pricing flexibility, challenges in enrollment as students make the choice to attend lower-priced institutions, delays in capital investment and slowing of tuition, gift, and endowment revenue resulting in tighter operating margins," analysts wrote in a recent report on the sector.

"The balance sheet weakening experienced by higher education comes after a long boom in capital investment and spending undertaken by colleges to position themselves competitively in the student and research markets."

CSF's endowment has fallen to less than half its value - to $2.2 million from $5.7 million - not just from investment results but from borrowing to pay for school operations. Since 2005, it has borrowed $3.5 million for operations with plans to pay back the endowment. But as financial difficulties grew, the college stopped reimbursing the endowment.

The most well endowed higher education institution in the nation, Harvard University, has seen its endowment fall 30% to $24 billion, while Yale University has seen its endowment plunge 26% from a peak of $23 billion to $17 billion.

Oklahoma State University has been forced to shrink plans for an athletic village after an endowment fund donated and managed by oil tycoon and OSU alumnus T. Boone Pickens fell by $282 million to a mere $125 million.

Texas A&M University's athletic department has seen its endowment plummet from $70 million to $40 million, raising doubts about whether it can afford to repay an interest-free $16 million loan issued by the university.

At a conference on higher education in April, Standard & Poor's analysts mapped a future that will be challenging at least until 2012, with some cushion from federal stimulus funds in the meantime.

"There's a bit of a cushion for 2010, 2011 from the stimulus, then you hit a cliff," said Susan Carlson, director for higher education and nonprofits at Standard & Poor's

"If you're a private university, that cliff, depending on your endowment draw formula, could hit in 2011," she said. "Everybody needs to be prepared right now. There's a lot of slash and burn."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.