Remote learning, social distancing, and student safety aren’t the only challenges facing the higher education sector amid the protracted global health crisis. Colleges and universities worldwide are also currently grappling with declining enrollment rates, relatively flat tuition, and steep discounting to entice prospective students. In response, to make up for lost revenue, many institutions are cutting salaries, delaying retirement contributions, and slashing non-essential capital expenditures. Some are even eliminating academic programs and increasing endowment spending.
Despite these headwinds, we continue to like the higher ed municipal bond sector for many of the same reasons laid out in our June blog post and see attractive opportunities in select areas of the market. Of course, deep credit research will be critical to uncovering the potential sector “winners” and avoiding the “losers.”
Overall enrollment is down, but some areas are benefiting from shifting demand.
As of this writing, about 75% of degree-granting institutions have reported enrollment numbers for the fall of 2020:
- Undergraduate enrollment declined from the prior year, led by falling numbers for nonprofit private institutions and community colleges (Figure 1).
- Somewhat surprisingly, freshman enrollment at both four-year public and private colleges was down sharply (-10.5% and -8.5%, respectively) on a year-over-year basis.
- International student enrollment (-14.9%, undergraduate; -7.8%, graduate) has been playing out as expected, given travel restrictions amid the pandemic. We will be monitoring this trend closely.
Figure 1
- Enrollment in graduate, post-baccalaureate, and graduate certificate programs increased year over year (Figure 1), helped by adult learners looking to “reskill.” Online certificates present a good opportunity for the top 100 schools to seek increased revenues without diluting their brands/existing full-time programs.
- Community colleges suffered the largest enrollment decline (-9.5% year over year), having lost market share to institutions with well-established online learning platforms and lower-income students who were disproportionately impacted by the pandemic.
- We are seeing more collaborations among colleges and technology companies as many institutions seek online coursework program managers.
Higher ed credits have multiple capital-raising levers.
Highly rated institutions have taken advantage of low interest rates to refinance and structure their debt service to provide interim budgetary relief. Enrollment uncertainty and cash-flow shortfalls had resulted in the use of lines of credit and commercial paper. We anticipate additional taxable municipal borrowings in the near term to refinance short- and long-term debt. Meanwhile, the swift recovery in the capital markets has supported endowment returns, which should be positive for fundraising. Recently passed fiscal-stimulus aid to colleges will likely benefit lower-rated credits.
Traditional nonprofit higher education remains slow-moving, reputational, and campus-based.
Most college coursework is now offered online. The main question for many higher ed management teams going forward is how they will complement the existing on-campus experience with rapid digital transformation to engage the consumer; achieve better student outcomes; prepare students for the workforce; and deliver a higher-quality education in the fall of 2021 and beyond.
Investment takeaways
- The sector’s asset/liability framework tends to favor municipal bonds issued by higher-rated institutions with large endowments, generous donors, and low borrowing costs.
- Flagship and some regional public universities that offer affordable education and are vital to regional economies look attractive longer term.
- Credit spreads between highly rated universities and their lower-rated (A/BBB) counterparts have widened materially, presenting potential opportunities in colleges with specialized program offerings and strong midsized private universities.
