Sector themes we are watching
Campus reopenings and student decisions will vary.
Campus reopenings will differ by state and the size of the institution. For example, California State University already decided to close all 23 campuses this fall, while smaller institutions such as Notre Dame and Boston College announced plans to reopen campuses.Meanwhile, freshmen and returning students may weigh different options, such as taking online classes the first semester or staying closer to home — a benefit for public universities. Transferring to lower-cost or even “reach” schools could also be possible due to enrollment dislocations. Management teams say they are on track to meet freshmen enrollment goals based on deposits received, but most say they won’t know for sure until classes resume in September.
Pricing power will continue to trend lower.
After the global financial crisis (GFC), consumers became more cost-sensitive. This reality, coupled with weaker demographics in some US regions, has forced colleges to increase scholarship offers. Freshman discounting for private colleges is about 40% on average. Colleges are making “counter-scholarship” offers to attract students and taking candidates off waitlists earlier to fill freshman seats. There is talk of tuition freezes for the upcoming semester, as consumers push back on the “college experience” potentially being virtual. Slower net-tuition growth rates have forced colleges to raise student and dorm fees faster and to rely more on investment returns, fundraising, research grants, and other sources.
Flagship public universities may see net enrollment growth, but state aid will fall.
Public universities are a relative bargain, with an average net tuition per student of around US$10,000/year. These universities should benefit from more in-state students opting to stay closer to home. However, public universities that rely on higher-paying out-of-state students may see near-term enrollment declines. States facing revenue shortfalls and budgetary challenges will likely cut state aid for public universities.
International enrollment may decline further.
Travel restrictions and changes in US foreign diplomacy may weaken overall international demand and enrollment. For example, many international students who left the US may not come back. STEM-focused graduate programs with a larger percentage of overseas students will be hit hardest, while we are less concerned about law and business school programs that often have countercyclical demand. International students who typically pay full tuition may see discounts as US universities compete for their enrollment.
Liquidity borrowings for elite universities are on the rise.
We are seeing an increase in taxable bond issuance among colleges and universities. The market continues to pay up for elite institutions, as evidenced by their recently issued debt trading at premium to other muni sectors and investment-grade corporates. This gives highly rated universities flexibility to use bond proceeds to fund short-term liquidity needs, endowments, and future capital projects. We believe operating challenges related to COVID-19, liquidity concerns, low interest rates, and large unfunded capital commitments are driving these borrowings. On the plus side, top-tier institutions have available lines of credit and access to commercial-paper programs, while leverage remains low and debt management has improved.
Closings of small colleges will likely accelerate.
We expect closures to be limited to smaller colleges and do not view the current crisis as a systemic problem for the broader sector. We believe colleges with fewer than 1,000 students are most vulnerable, as they typically have smaller operations and endowments. Employee cuts and furloughs, administrative pay cuts, and deferred capital expenditures should help extend these colleges’ lives, as will increased fundraising and donor support.
Structural themes bear monitoring.
There are also several longer-term trends we are watching. For example, demographic challenges will likely persist with projected declines in US high-school graduates. The move from tenured to adjunct faculty should improve operating flexibility for some universities. Additionally, student demand will continue to evolve amid the pervasiveness of online offerings.
What we like about the sector
- The value of a college degree is not declining, in our view. Career advancement and social mobility will remain dependent on education.
- Stable enrollment growth, despite the ongoing structural challenges, suggests winners may emerge among colleges outside of the top 100.
- Declining leverage and improved liquidity are being supported by successful fundraising and capital campaigns, particularly at elite schools.
- Institutions are adapting to market forces and diversifying their business models toward health care, research, and investment in an effort to become less tuition-dependent.
- Off-balance-sheet financing via the use of public-private partnership projects helps preserve debt capacity.
- Specific areas of potential opportunity include colleges with specialized program offerings; midsized private universities with strong liquidity and demonstrated enrollment growth; and flagship public universities with diversified operations and regionally important jobs.