Wisconsin liberal arts college junked amid enrollment struggles

CHICAGO — Wisconsin-based Beloit College lost its investment grade rating as it struggles with the fiscal impact of declining enrollment and the need to raise tuition subsidies to bolster appeal.

Moody's Investors Service dropped the college's rating two notches to Ba1 from Baa2 and warned more erosion could follow by assigning a negative outlook.

beloit college

“The downgrade to Ba1 reflects the college's highly challenged business model with declining enrollment and an increasing tuition discount rate leading to very weak operating performance,” Moody’s wrote.

The school in the southern Wisconsin city of Beloit has only $23 million in debt but its structure adds to rating pressures.

“The college's debt structure introduces material liquidity risk due to multiple financial covenants, which could result in acceleration of debt if tripped,” Moody’s added.

Beloit's student market is highly pressured as its incoming fall 2018 class is expected to fall about 25% below its goal. In addition to the smaller incoming class, the tuition discount rate for incoming students is at about 70%.

“Combined with a declining retention rate, the college is expecting multiple years of declining net tuition revenue. With limited scale, adjusting to projected revenue declines through expenditure reductions will be difficult to achieve in the near term,” Moody’s warned.

The school’s credit profile benefits from its overall wealth and reserves, which provide some ability to adjust over a multi-year period barring an acceleration of debt repayment, and it has strong donor support relative to peers.

Those resources will “be increasingly pressured as the college continues to work to improve its operating balance and the college's credit profile is highly vulnerable to any financial market corrections that would result in a reduction in reserves or liquidity,” Moody’s warned. “The negative outlook incorporates the potential for additional credit deterioration should the college not be able to stem enrollment declines and right size operations over the next two years.”

A failure to achieve the covenanted debt service coverage levels in fiscal 2018 or to obtain a waiver in the event of low debt service coverage could drive a downgrade.

The school’s 2014 and 2016 are secured by a pledge of revenues including student fees and tuition as well as a mortgage on campus property and facilities excluding its $38 million multi-purpose Powerhouse facility.

Bridge financing loans that supported the construction of the Powerhouse facility are the obligation of Beloit Powerhouse, LLC and are secured by a mortgage on the Powerhouse facility and land. Beloit College serves as the guarantor for the organization and the loans are considered to be subordinate to the college's senior debt obligations.

Beloit College generated approximately $51 million in revenues in fiscal 2017 and enrolled 1,350 students in the fall 2017 semester.

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