Higher ed's fiscal challenges bring mergers, closings, P3s

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The higher education sector’s adjustment to population shifts and other changing demographic trends has included mergers, closings, online expansion and public-private partnerships.

The Northeast, in particular, has experienced a consolidation wave.
Headline moves have included Boston University’s absorption of nearby Wheelock College in June and Thomas Jefferson University merging with Philadelphia University in Pennsylvania in July 2017.

Meanwhile, Mount Ida College in Boston’s Newton suburb closed altogether, with the University of Massachusetts-Amherst acquiring its assets. In 2016, Dowling College on Long Island closed its doors, then filed for bankruptcy.

Mergers should continue, notably in the Northeast, according to a capital markets expert.

“The attributes of schools forced to either close or merge tend to be similar: a small student population, growing dependence on tuition revenue, and declining enrollment,” said Roy Eappen, a senior analyst at Wells Fargo Securities. “Population has grown in the South and Southwest while slowing down in the Northeast and Midwest. Schools are largely dependent on regional population.”

The ratio of in-state students to first-time enrollment is roughly 80% nationally, according to U.S. Department of Education and Wells Fargo data.

“Regional population does matter,” Eappen said.

Sustained stress will mean some more of the roughly 1,700 private, not-for-profit colleges are in danger of closing, according to Moody’s Investors Service. Responses will range from merging to a material transformation including offering fewer programs and focusing on a handful of those in higher demand.

“Still, private colleges — even less selective smaller ones — remain remarkably tenacious in the face of credit stress, which will limit a large-scale shakeout of the industry for now,” Moody’s said. “Trends have prompted some colleges and universities to explore mergers even prior to the onset of deep financial distress.”

Credit quality will depend on evolving demographic trends in higher education, said Moody’s, leading to shifts in demand and enrollment among institutions, as well as affecting the ability to increase net tuition revenue.

“Overall, we expect colleges and universities to withstand these changes, although some colleges will struggle to adapt,” Moody’s said. The drop in high-school graduates will challenge some institutions, Moody’s added, while further urbanization will benefit universities in larger cities and challenge those in rural or more remote areas.

Credit rating actions over mergers have largely been either muted or even slightly optimistic over these transactions, according to Eappen.

Moody’s viewed the UMass acquisition of the defunct Mount Ida as a credit positive while it does not expect BU’s absorption of Wheelock to change its cash-flow margin. S&P maintained its positive outlook on BU.

As universities merge, public-private partnerships could be increasingly viable, say officials with one P3 firm.

Mergers could have a multiplier credit-positive effect, according to Geoff Eisenacher, vice president of partnership development at Corvias, an East Greenwich, Rhode Island firm whose P3 activity has spanned higher education, municipality and the military.

Anywhere you can show material value, upgrade savings and pledge a revenue stream, that can be leveraged and you can use capital for that,” Eisenacher said. “It does not have to be a fee-based revenue stream.”

The University System of Georgia has undergone three consolidations since Corvias in 2015 closed on a $548 million, 40-year deal to develop and manage student housing for the system’s campuses statewide.

Corvias considers the Georgia deal, along with a partnership with Wayne State University in Detroit, as its signature campus P3 deals. Wayne State involved a campus housing partnership that provided the university with about $1.4 billion in total value and compensation over 40 years.

“Over the last 12 to 24 months we have seen an increase in the requests for information regarding the use of P3s,” he said.

Eisenacher sees more bundling of campus facilities in P3 activity, as opposed to single-purpose projects such as dormitories. “There’s more than one component."

Combination projects can help offset both economic and construction disruption on campuses. “The way of doing things, had been project by project by project … a never-ending series of projects strung together like pearls,” Eisenacher said.

Separately, while Moody’s acknowledged short-term risks with Purdue University’s acquisition of Kaplan University — renamed Purdue Global — it considers the acquisition beneficial to Purdue’s credit profile long-term.

Corvias two weeks ago closed on its 30th partnership, military, student housing and municipal. Its $126 million, 65-year agreement with Purdue, in West Lafayette, Indiana, involves a 1,300-bed student housing complex.

Purdue essentially deflected operational risk as opposed to doing the deal for balance-sheet concerns or to cover debt.

“There’s such a pattern of comfort for the university in knowing what it’s dealing with for the next 65 years,” said Paul Naughton, Corvias senior vice president of operations.

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