Despite possible downgrades, higher ed sector will likely still issue bonds

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Some colleges that started in-person learning this month needed to make quick adjustments after students tested positive for the coronavirus. But one analyst said despite the challenges to revenues and possible downgrades should schools decide to sell bonds, issuance will continue.

An increasing number of schools were forced into online learning this fall as a result of challenges containing the COVID-19 pandemic on campuses, creating revenue headwinds for the higher education sector.

The stiff obstacles were highlighted last week when the University of North Carolina at Chapel Hill saw 177 positive virus tests, prompting a sudden shift to virtual instruction just days into the new semester and students being encouraged to leave residence halls without penalty.

An aerial view of the University of Notre Dame, where classes were moved to a virtual learning model for at least two weeks on Aug. 18 following a spike in COVID-19 cases.

The University of Notre Dame also encountered early barriers to its campus-reopening plan and moved to an online format for at last two weeks on Aug. 18 after positive cases jumped to 147 from 58 in one day.

Michigan State reversed course, nixing in-person classes last week just before scheduled move-in days for undergraduates. The university's president, Dr. Samuel L. Stanley, said it was “unlikely” the school could “prevent widespread transmission of COVID-19” if undergraduates returned.

“Colleges face major challenges in getting through an in-person fall semester,” said Robert Kelchen, a higher education finance professor at Seton Hall University. “Some colleges will likely succeed thanks to a combination of lower virus rates in the surrounding area, frequent testing of students and employees, and a fair amount of luck, but many colleges will be forced to pivot to online classes at some point in the fall.”

S&P Global Ratings credit analyst Jessica Wood said the enrollment hits facing colleges during the 2020-21 academic year put schools at risk for a credit downgrade should they choose to issue bonds. But most schools would likely stick to near-term borrowing plans, she said, and a number of institutions proceeded with bond transactions this summer to lock in low interest rates for either refundings or capital projects.

“Bond activity has been pretty robust and we have seen a lot of schools issuing debt,” Wood said. “While we did see some schools pulling back on capital plans, we have also seen some schools moving forward with capital plans, building dorms, building other strategic plans, so I don’t think that is necessarily going to stop.”

The University of Chicago, which is offering a hybrid instructional model this fall, saw its credit outlook revised to negative from stable this month by Fitch Ratings and Moody’s Investors Service prior to a planned taxable bond deal due to fiscal pressures from COVID-19.

S&P maintained its negative outlook for higher education bonds in an Aug. 18 midyear sector review, citing weakened enrollment levels this fall due to COVID-19-related social distancing measures that will result in reduced tuition and auxiliary revenues. The virus-induced recession will add budgetary stress to almost all other revenue sources, including state funding for public colleges and fundraising.

Half of higher education institutions that S&P rates announced plans to open in the fall with some variation of a hybrid model, while 34% committed to a fully in-person fall semester. Wood noted auxiliary revenue sources such as housing, dining and parking fees comprise around 10% of operating revenues at most institutions and will be “particularly depressed” during the 2021 fiscal year because of de-densification efforts to combat the virus.

While colleges received funding this past spring under the federal Coronavirus Aid Relief and Economic Security Act, there is no indication that Congress will provide any new rescue aid for higher education, she said.

"There is going to be a mismatch between revenues and expenses and without additional federal funding, I think, for some schools that is going to be problematic,” Wood said.

The absence of any in-person schooling would undercut most colleges’ auxiliary revenues and also could trigger reduced tuition rates, Richard Ciccarone, president of Merritt Research Services, wrote in an Aug. 10 CreditScope report on higher education. The Merritt analysis projects a 35% hit to operating revenues at private colleges and 25% at public institutions based on current COVID-19 conditions.

Public colleges face revenue risks going forward due to reliance on state funding support that could be reduced as states grapple with their own budget stress, Ciccarone said. While budget cuts to public institutions have been “relatively modest” so far this year, he said, states will be forced to lower appropriations if revenues don’t meet projections and could worsen in future years depending on the length of the economic downturn.

“Over time what you will find is that the vulnerability in state reductions is going to be greater,” said Ciccarone. “The longer this crisis goes on and affects the states you’ll see a greater impact over time.”

Clarification: The original version of the story was revised to indicate that Merritt's projections for higher education revenue are based on current COVID-19 conditions.

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Higher education bonds Coronavirus University of Notre Dame Board of Governors, University of North Carolina