Tuition revenue struggles bring negative outlook to USciences

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Cash-flow struggles amid sharp tuition revenue declines the past few years placed a Philadelphia private college on the verge of another credit downgrade one year after its rating was dropped into low investment grade territory.

Moody’s Investors Service revised the outlook on the Baa1-rated University of the Sciences bonds to negative from stable last week citing a “significant deterioration” of the school’s finances last year following a 14% dip in net tuition revenue from 2017 to 2019. The rating action, which occurred just over a year after Moody’s cut USciences’ debt rating one notch to Baa1 from A3, affects about $176 million of debt issued through the Philadelphia Authority of Industrial Development and the Pennsylvania Higher Educational Facilities Authority.

University of the Sciences in Philadelphia experienced a 15% enrollment drop between 2015 and 2019.

“The revision of the outlook to negative incorporates ongoing student market challenges contributing to constrained revenue growth and narrowing financial operations,” Moody’s analyst Christopher Collins wrote in a Feb. 28 report. “While improvement is likely to materialize in fiscal 2020, the university's debt affordability will remain very weak.”

USciences enrolled 2,155 full-time students for the fall 2019 semester, a nearly 15% drop from 2015. Collins said the university’s long-term credit quality is closely tied to sustaining tuition revenue growth since this accounts for 83% of the university’s total operating revenue.

Collins noted that UScience’s operating cash-flow margins will improve during fiscal 2020, but will not reach its historical levels that were in the 15% to 18% range. In 2019 the school generated an operating cash-flow margin of just 4.6%, which was insufficient to cover debt service. The weak performance was driven by a second consecutive year of sharp revenue declines coupled with having roughly $4 million in one-time combined costs related to severances and a pledge write-off, Collins said.

Moody’s concurrently affirmed the USciences Baa1 rating due largely to the school having solid operating reserves and strong liquidity despite some recent spent downs. Unrestricted monthly liquidity covered 543 days of operating expenses in 2019, which Collins said provides “runway” as the university implements strategies to improve student demand and restore net tuition revenue growth. The Baa1 rating affirmation also reflects the university maintaining “some market distinction” with its health sciences-focused programs in an “attractive urban location, according to Collins.

Dr. Valerie Weil, USciences chief operating officer, noted the school recently opened a new residence hall and the college welcomed its largest incoming class in five years last fall. She also stressed that the school launched new online programs in January for healthcare informatics and healthcare administration with additional courses planned throughout 2020.

“USciences is responding to the challenges of the higher education market by investing in new programs designed to reach out and appeal to a broader and more diverse group of prospective students, including adult learners and those seeking to complete their degrees, interested in benefiting from our expertise in science and healthcare,” Weil said in a statement. “The funding for these programmatic and infrastructure improvements have a near-term negative financial impact for the university — reflected in the negative outlook, but our expectation is that long-term they will be well worth the resource investment.”

The USciences bonds are fixed rate with “relatively level” annual debt service payments that hover around $11 million through final maturity in fiscal 2048. Collins said this debt structure provides “predictable” costs that will aid the university when formulating long-term financial plans.

All of university’s outstanding bonds are unconditional general obligations of the university secured by a pledge of unrestricted revenues. The school, which was founded in 1821, has no debt service reserve fund.

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Higher education bonds Bond ratings University of the Sciences (Pa.) Pennsylvania