Moody’s Downgrades Higher Education

Just a few weeks ago, Moody’s was an outlier among the major rating agencies by rating debt associated with higher education institutions with an outlook of stable rather than negative ratings by S&P and Fitch’s.  What a difference a few weeks can make as COVID-19 has swept the globe and significantly impacted the operations of higher education institutions across the United States.  COVID-19 has been mentioned in some of the more recent bond issuances as a factor that could impact their business model, and many are still struggling to quantify that impact.

Institutions not only need to be focused on many of the same fundamentals that apply to all businesses, such as liquidity, revenue generation and cost containment, but also to some that are unique to higher education, such as outreach plans for admissions.

Many of the concerns that S&P cited in its latest rating update, which focused on enrollment pressures, including pressure on international enrollment, are now potentially compounded in the wake of COVID-19 and are also highlighted by Moody’s recent update as well.

The big unknown is what will happen for many institutions for their current recruitment efforts, which typically culminate around this time of year.  Many will need to rethink their budgets and projections for the upcoming year to ensure that they are realistic in light of this uncertainty.  In addition, models of prospective student engagement will be tested right now, as counselors and prospective students aren’t able to interact in person and will require institutions to find either new or different ways of connecting with those prospective students.

If institutions have not already undertaken steps to model the impact on the Department of Education’s Financial Responsibility Score, financial covenants and other key metrics, now is good time to do so.  It is also critical to undertake an exercise to model your cash burn in light of institutions unexpectedly refunding a portion of room and board, as many institutions are heading into the time of year that is the typical cash low point for them.  Are there other means or sources of liquidity that you should explore, such as refinancing debt or looking to restructure vendor contracts?  What is availability under your line of credit?  How could you delay or defer certain expenditures?

Additionally there are also challenges with the stock market being down more than 30% from the all-time highs.  Some institutions have temporarily opted to shift endowment draws to borrowings on their line of credit to prevent liquidating a portion of their investments in this period of market turbulence, but it may limit flexibility on liquidity when it might be needed for other priorities.  However, this market impact won’t be just felt in one year as this downturn impact the endowment draws for the next several years for many institutions. Lastly, many of your donors are also feeling the same pain in the stock market and a prolonged downturn has the potential impact charitable giving in the upcoming year as well.

It is important to model the cash burn now to understand what additional sources of liquidity either can be uncovered or tapped to meet not only the typical trough in the cycle of cash for institutions, but potentially new budgetary holes that have been created as a result of COVID-19.  Institutions should think carefully and strategically on how their liquidity will be used right now until further clarity is available on how COVID-19 will impact many institutions.

Please visit our Coronavirus resource page at schneiderdowns.com/our-thoughts-on/category/Coronavirus for related content.

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The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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