Rising leverage brings downgrade to Barnard College
An increased debt load compared with its peer schools drove a downgrade to Barnard College ahead of a new borrowing.
Moody’s Investors Service dropped Barnard’s bond rating one notch to A2 from A1 Tuesday citing the private women's liberal arts college’s rising leverage amid weakening finances. Barnard’s credit outlook was also revised to negative with the rating change affecting roughly $102 million of 2015A revenue bonds issued by the Dormitory Authority of the State of New York. Barnard, which is affiliated with Columbia University, is slated to issue $80 million of Series 2020A revenue bonds through DASNY on Jan. 30. Proceeds will fund the first phase of renovations to Barnard’s Altschul Science Center and other capital projects on the Manhattan campus.
“The downgrade to A2 reflects a combination of the college's weakened financial performance and significant increase in debt with the proposed bond issue and a recent significant capital lease for student housing,” Moody’s analyst Debra Roane wrote. “The negative outlook reflects our expectations that operating performance will remain thin over the next two years before improving and that leverage will remain elevated compared to operations and reserves.”
Roane noted that Barnard’s fiscal 2019 operating cash-flow margin was less than 4% due largely to opening a new Milstein learning center with margins also expected to remain low the next two years because of new strategic investments, labor costs and increased debt service. The college’s leverage well exceeds comparisons to other A1-rated colleges with flexible reserves covering proforma debt by 0.8x compared to the 2.7x median in 2018, according to Moody’s.
Barnard’s operations will face near-term challenges as it gears up to fund campus improvements through 2025 exclusively with bond proceeds. Roane said increases in debt service payments, associated with the new borrowing will add to budgetary pressure, but the college has no additional bonding plans beyond this year.
Roane said Barnard has identified several areas of potential budgetary flexibility to support added debt service including increases in tuition rates, upping enrollment, limiting staff growth, creating benefits savings and achieving revenue increases from pre-college programs. Barnard’s liquidity is below peer institutions a 159 monthly days cash on hand compared with a 419-day 2018 median for other A1-rated schools.
“Barnard’s weak financial performance is likely to persist over the next several years, driven by expenditure pressures as it seeks to enhance its programs and incorporate the costs of increasing debt service and salaries,” Roane wrote. “As a result expenses are outpacing still strong revenue growth.”
The college’s high leverage is partially mitigated by $30 million of the debt being bridge financing that will repaid through pledges for the learning center that have already been fully committed, according to Roane. The planned series 2020 bonds will have delayed principal and partially capitalized interest until 2023 and mature in 2049. Around half of the $80 million in bonds will be issued at variable rates and privately placed with a bank to provide payment flexibility as gifts are received.
Financial challenges facing Barnard are offset by the college’s national and global reputation as a highly selective women's liberal arts college enrolling 2,639 full-time students with less than 12% of applicants admitted in fall 2019, according to Moody’s. Barnard also benefits from a close affiliation with neighboring Columbia, which allows it to leverage facilities, sports engagement and academic offerings of a large private university.
The Barnard press office issued a statement saying that the Moody’s downgrade reflects “significant investments” made for a new Milstein academic center along with the acquisition of property for a new residence hall and other facilities. The statement stressed that the school still has the sixth highest Moody’s rating and is well positioned to succeed in the future with a strong academic profile.
“Through our robust curriculum, world-class faculty dedicated to teaching and empowering a diverse group of women to excel in their chosen fields, Barnard remains one of the most selective academic institutions in the nation,” the statement said. “The quality of our undergraduate programs that support digital fluency, research opportunities, and student access to professional studies and graduate programs at Columbia University — in the heart of New York City — are all an integral part of our overall strength as a leading institution devoted to educating leading women.”