Enrollment, tuition pressure bring downgrade to University of the Sciences

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Tuition pressures combined with a heavy debt burden led to a downgrade for the Philadelphia-based University of the Sciences.

Moody’s Investors Service lowered USciences bonds one notch to Baa1 from A3 Wednesday, citing the private nonprofit school’s weakening 2019 fiscal year operating performance, driven largely by a second consecutive year of declining net tuition revenue.

The downgrade affects $178 million of debt. The outlook was revised to stable from negative at the new, lower rating.

“With highly competitive market conditions and weak regional demographics, stabilizing enrollment and restoring net tuition revenue growth will prove challenging,” wrote Moody’s analyst Christopher Collins. “While the university has no additional borrowing plans, its existing debt burden is very high relative to operating revenue and prospects for near-term improvement are low.”

The outstanding USciences debt includes revenue bonds sold through the Philadelphia Authority of Industrial Development and the Pennsylvania Higher Educational Facilities Authority.

Fitch Ratings affirmed USciences at BBB-plus with a stable outlook in January.

USciences, which enrolled 2,105 full-time students in the fall of 2018, has seen a 19% enrollment dip since 2014, according to Moody’s. The private college saw a 6% annual net tuition revenue decline in the 2018 fiscal year and is projecting an additional 9% drop for 2019. Around 82% of the college’s total revenue derives from net student revenue.

In an effort to attract more students, USciences lowered tuition for the fall 2018 semester to $25,000 annually from the nearly $40,000 charged the prior year. Collins noted that this strategy us unlikely to “materially improve” student demand and will also limit near term pricing flexibility in challenging market conditions for higher education.

Despite a rise in applications, only 13% of admitted students enrolled last fall.

“Prevention of additional operating performance deterioration will be closely tied to the university's ability to restore revenue growth and its ability to effectively manage enrollment,” said Collins. “At this point, it is uncertain if the tuition reset initiative will positively affect student demand and lead to restoration of net tuition revenue growth.”

Collins noted that USciences is aided by “ample liquidity” along with “solid cushion of reserves relative to its operations as the university’s leadership undertakes strategies to improve operating cash flow and debt service coverage by 2020. The school looking to combat revenue challenges by conducting yearly programmatic reviews, adding market driven programs, expanding online offerings and establishing new partnerships, according to Collins.

Dr. Valerie Weil, USciences’ chief financial and operating officer, said the university should be positioned for financial improvements as ongoing projects come to fruition.

Weil noted that the school recently invested in a new residence hall called the Living & Learning Commons that has been a positive draw for prospective students. She added that new academic programs are also being launched “in desirable fields” like data science and neuroscience with a “significant expansion” to online course offerings also planned.

“The University remains optimistic about its financial position in the long term,” said Weil in a statement. “The University is continuing to manage expenses aggressively and we are confident that strategic investments in our people, programs, and facilities will allow us to improve our margin in the coming years.”

USciences’ bonds are fixed rate with “relatively level” annual debt service payments of around $11 million through the fiscal 2048 final maturity, which according to Collins provides predictable costs that will help the university when crafting future financial plans.

All bonds are unconditional general obligations of the university secured by a pledge of unrestricted revenues. The university does not have a debt service reserve fund.

Founded in 1821 as Philadelphia College of Pharmacy, the school rebranded from Philadelphia College of Pharmacy and Science to University of the Sciences in 1998. It is focused on health professions and natural sciences.

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Higher education bonds Ratings Philadelphia Authority for Industrial Development Pennsylvania Higher Educational Facilities Authority Pennsylvania