Declining enrollment drags down small Vermont college's rating

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Enrollment pressures coupled with a heavy reliance on tuition revenue triggered a rating downgrade for a small Vermont Catholic college.

Moody’s Investors Service lowered Saint Michael's College's bond rating one notch to Baa2 from Baa1 and assigned a negative outlook last Thursday citing a 15% decline in net tuition revenue between 2015 and 2019. The downgrade, which leaves SMC just two steps above junk level, affects roughly $50 million of revenue bonds issued through the Vermont Educational and Health Buildings Financing Agency.

“While management has demonstrated the willingness and ability to reduce costs, the college's small size and scope of operations limits its ability to cut costs over extended periods without negatively impacting student market position,” Moody’s analyst Mary Cooney wrote in a Feb. 20 report. “In addition, near term use of cash to fund strategic initiatives constrains already lagging growth in cash and investments and will weaken operating performance over the near term.”

Cooney noted SMC’s enrollment dropped 20% from 2,153 full-time students in 2015 to 1,721 last fall, and said the negative outlook reflects the potential for further deteriorating credit conditions if the college is unable to reverse the trend. SMC has some financial flexibility with 225 days cash on hand, but the school is constrained by limited donor support, she said.

SMC did not immediately respond to a request for comment.

The college is focusing on building more career development programs by adding health science and public health majors, Cooney said. The school also plans to invest additional funds over the next three years to enhance marketing, financial aid packaging, athletic recruitment, student retention and graduate/online programming.

SMC plans to add around 440 freshman and 35 transfers next fall, which, Cooney said, would return it to prior matriculation levels. Roughly 80% of the college's students come from outside of Vermont. Student charges account for 85% of operating revenue.

“SMC's historically consistent operating cash flow margins will face greater pressure in the fiscal 2020-22 period with increased use of one-time funds for student-centered investments,” Cooney said. “The college expects to monitor the outcomes of planned expenditures, but prolonged use of cash in the absence of improved enrollment and net tuition revenue will further pressure SMC's credit quality.”

The Northern Vermont college had $52.6 million of outstanding debt in 2019 mostly from bonds issued in 2012 and 2015. SMC has no plans to take on additional debt. The college had sold land and buildings north of campus, prior to 2017, to fund academic investments and bolster general cash reserves, according to Moody's.

A number of small tuition-dependent New England colleges like SMC have struggled with enrollment pressures in recent years amid increased competition for a shrinking pool of college-age students. Three other Vermont colleges closed last year, including College of St. Joseph, Green Mountain College and Southern Vermont College . Marlboro College also announced late last year it was planning to merge with Boston’s Emerson College, which would involve closing the Southern Vermont campus. It previously abandoned a planned partnership with University of Bridgeport.

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Higher education bonds Downgrades Bond ratings Vermont