Dramatic changes to the higher education business model have forced colleges and universities to diversify their revenue sources, which brings risks as well as opportunities.

Rating agencies have noticed that those opportunities and risks affect different classes of institutions differently. But despite those risks, the investing community retains its interest in higher education debt.

Representatives of both groups said as much in a panel to attendees at The Bond Buyer's third annual 501(c)3 Conference on Healthcare, Higher Education and Cultural Institutions held Tuesday at the Crowne Plaza Times Square.

Technology and globalization threaten the higher education business model, which is otherwise a mature industry with few avenues for dramatic growth, said panel moderator Akiko Mitsui, a senior analyst in fixed income credit research at Vanguard.

Globalization has brought hundreds of thousands of international students to U.S. schools, while the proliferation of online courses has brought thousands of students to a single class.

But the industry has been responding. It's taking steps toward change on geographic and physical bases by accommodating large numbers of foreign students, improving technology and expanding by spending little or using existing resources.

Whether these changes could prompt a ratings action on particular schools depends on how well each handles the risks and how well each is positioned financially to absorb the changes, said Karen Kedem, vice president and senior analyst for higher education at Moody's Investors Service.

Risks, for example, to national and global expansion strategies include start-up costs, the complexity of managing multiple campuses as well as quality control and brand dilution, Kedem said.

"There is complexity to managing multiple campuses," she said. "One of the biggest issues that we're finding is the reputational risk. And outside of quality control of the content that's delivered on that campus and potential brand dilution, there's a lot of reputational risk about entering certain markets, what's being delivered there, as far as content, and sometimes very vocal alumni … That's something we have to continue to monitor."

For investors, economic forces such as property taxes and the cost of capital represent important drivers for deciding whether to take on risk, said James Costello, a managing director at JPMorgan.

"What's incredible about the taxable and tax-exempt bond markets is the lack of premium that's being charged to weaker credits," he said. "Right now, someone who's triple-B-rated can lock in 30 year money at a rate of less than 4% on a tax-exempt basis, and I don't see this as a temporary window, or some six-month opportunity. This kind of interest rate could be available to joint venture, private partnerships throughout 2013. That could really drive a lot of the risk analysis that people look to."

In general, there is an appetite for risk in the private sector in the investment community when it comes to working with a college or a university, Costello said. And for context, he added, rarely in the last 15 years have investors faced a cost of capital this attractive.

Eric Olson, vice president and associate treasurer at Drexel University, in Philadelphia, provided examples of how one institution has responded to the changes. There were two factors confronting it: Drexel wanted to expand its brand beyond its regional position, and it was experiencing strong growth to student enrollment that presented challenges to its limited resources and geographic footprint within the city.

Drexel decided to float a loan to build new structures within its boundaries as well as refit and upgrade existing buildings, Olson said. It also joined private donations to those credits and entered into a public-private partnership to finance construction for new housing.

Drexel also opened a satellite campus in Sacramento, Calif. to attract students in East Asia. It also signed a collaboration agreement with the Shanghai Advanced Research Institute, of the Chinese Academy of Sciences, to share research efforts for scientific and technological innovation.

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