Higher Education Debt and Capital Market Overview

The higher education industry is in a state of flux from the coronavirus and more. Casey Fox, Higher Education Municipal Advisor at PFM (Public Financial Management), spoke to the current state of the higher education debt and capital markets at Synario’s Client Summit in late October 2020.

Casey’s considerable experience and knowledge as a Municipal Advisor to multiple higher education clients shine through in this expeditious presentation on the state of the industry.

The presentation begins with a look at the current state of the higher education sector as a whole, noting the increased scrutiny on college and university financial sustainability by investors and credit rating agencies.

However, Casey notes that the interest rates on both debt and treasury loans are at all time historic lows as of October. He points out that, although there was a significant dip in new bond issuance volume in March of 2020 due to the coronavirus, the volume has since moved back to representative levels when compared to 2019.

So where does this leave the debt and capital markets for the higher education industry for the remainder of 2020? Casey notes that we are experiencing some short-term market volatility due to the delayed results of the U.S. presidential election results. This has pushed a higher supply of bond issuances in October of 2020 as lenders attempt to avoid the unknown market conditions post-election.

In the presentation clip below, Casey dives into the specific trends of the debt market including taxable bond issuances, negative credit rating agency outlooks, and a tightening of private bank lending.

The higher education debt markets are seeing a dramatic rise in taxable bond issuances due to institutions trying to take advantage of the historically low interest rates. The change in tax reform has eliminated the ability to refund bonds with tax exempt debt, so borrowers are turning to taxable bond issuances to realize savings with lower interest rates.

In opposition to the low borrowing rates, credit rating agencies are predicting a negative outlook for the higher education industry as a whole. Casey comments, “that’s been the case for several years due to enrollment pressures… and COVID pandemic.”

Many institutions are seeing a downgrade or a negative watch in their credit ratings, especially as COVID-19 continues to rage across the U.S. This is compounded with the impending enrollment cliff expected to hit the entire higher education industry in 2025. You can learn more about the importance of enrollment modeling and the modeling the impending enrollment cliff by our article on international student enrollment modeling in Synario.

Even large public institutions are seeing a skeptical outlook by credit ratings agencies as multiple types of financial pressures continue to drive slower growth in the higher education sector.

During the Q&A portion of the presentation, Casey comments that “at the start of 2020, Moody’s moved their higher education outlook from negative to stable, however, as soon as the coronavirus began impacting enrollment projections in the late spring of 2020, Moody’s sent out a special report moving their outlook back to negative.”

The market uncertainty driven by the coronavirus and the U.S. presidential election has also tightened private bank lending in the higher education industry. Most banks are increasing the security measures required for colleges and universities to receive a direct bank loan, including increased security packages and financial covenants.

Credit Rating Outlooks

During the final slide of Casey’s presentation, he reviews various credit rating outlooks on colleges and universities ranging from small private institutions to large publics. The general trend is either a negative outlook or an outright downgrade to a lower credit rating.

Casey comments, “You will see a number of negative outlooks put on institutions and a number of downgrades… which is significantly higher than we have seen in the past.”