Midwest private colleges face continued enrollment declines

Fitch Ratings and Moody's Ratings downgraded Xavier University, a private Jesuit college in Cincinnati, to A-minus from A and to Baa1 from A3, respectively, last week.

Fitch pointed to the school's decision to take on more debt to finance the construction of a new College of Osteopathic Medicine at a time when operating performance has been weaker and enrollment has declined.

Xavier is far from the only Midwest higher education institution to struggle and indeed remains better placed than many of its neighbors.

"Any time you see enrollment declines, particularly on the private college side, that almost always translates into operating pressure," Emily Wadhwani, senior director and higher education sector lead at Fitch, told The Bond Buyer. "Because for them, tuition and fees are often such a meaningful amount of their revenue base, and here it's about 80%. That's not atypical."

Moody's said its downgrade "was largely driven by the risks associated with the material increase in leverage during a period of escalating student market and budgetary challenges." It noted that the college's new debt, $185.7 million of higher educational facility revenue bonds, raised its pro forma debt to operating revenue and EBIDA to 1.3x and 12.9x.

Moody's Vice President Meredith Moore told The Bond Buyer that opening a medical school in the current environment "presents numerous challenges," including meeting staffing requirements, developing physical assets, meeting student demand and setting aside funds in escrow to comply with Commission on Osteopathic College Accreditation requirements.

She added that Xavier is not the only school to suffer financially amid declining enrollment.

"We see enrollment struggles at many small, private colleges that are not very selective and are located in demographically challenged states, and that includes faith-based colleges," she said.

The downgrades were the latest bad news for Midwest private colleges in recent months.

This spring, Ohio's Notre Dame College shut its doors after years of enrollment declines and growing debt, Ideastream Public Media reported. School officials said they had sought debt refinancing, used pandemic relief money, launched a fundraising campaign and pursued potential higher education partners.

The college reported $20 million of variable rate bonds issued through the Ohio Higher Educational Facility Commission that mature in 2039, according to postings on the Municipal Securities Rulemaking Board's EMMA website. The deal involved Bank of America (BAC) and an interest rate swap, according to the college's most recent Form 990 IRS filing, for 2021.

In May, S&P Global Ratings downgraded Michigan's Albion College to BB from BBB and kept its negative outlook on the school, citing decreasing enrollment, weakened liquidity, structural operating deficits and continued endowment draws for operations.

On Sept. 10, Moody's revised the outlook of Valparaiso University, a private Lutheran school in Indiana, to negative from stable. Moody's rates the university's revenue bonds Baa2.

Other Midwest colleges receiving downgrades or downward outlook revisions recently include Columbia College in Chicago; Illinois College; Manchester University in Indiana and Hiram College in Ohio.

Midwest private colleges are struggling with a decline in enrollment that's sweeping the entire sector ? S&P downgraded 20 higher ed issuers in 2024 compared to nine upgrades, and revised down 15 issuers compared to six upward revisions. But it's hitting some colleges harder than others, according to data from Merritt Research Services, an Investortools company.

Merritt data on the seven-year compound average growth rate in enrollment shows that Midwest private colleges' decline of 1.5% was worse than the national decline of 0.67%. The best region in the country was the South, which was only down .04%.

The difference was even starker over the past year. The Midwest was down 3.16% while the national decline was only 1.84%. Doing the best year-over-year was the Northeast, down only 1.19%.

"That's the number one factor impacting the finances of Midwestern private colleges," said Richard Ciccarone, president emeritus of Merritt.

"Even very creditworthy schools sometimes miss their enrollment [target]," said KBRA Managing Director Douglas Kilcommons. "What we look for, as a rating agency, are situations where enrollment is a perpetual miss? The enrollment target that's being set is not achieved, or it's very volatile."

Kilcommons cited KBRA's 2023 report on private college credit ratings, which among other things aimed to dispel the myth that downsizing enrollment is necessarily a bad thing. The key question is whether a college can set an operating budget around a reliable enrollment number, he said. And he argued negative headlines about higher ed can be misleading.

"The sector itself, especially schools that pursue public market debt and bond ratings, those continue to be very strong," he said. "While you have seen some rating changes, those tend to be on the margins? You can go much lower than triple-A and still find a very stable segment of the higher education landscape. There are schools that are rated in the A category and even BBB category that are steady as she goes."

Still, the Midwest's weak demographic trends may be hurting certain types of private colleges, said Jessica Wood, S&P's sector lead for higher ed.

"Certainly areas where you've seen in-migration, like Texas, Florida ? a lot of schools in those areas are doing pretty well," she said. "In the Midwest, private schools that are highly regional and don't have much breadth in terms of geographic reach are going to be more challenged than schools that have more of a national brand."

HilltopSecurities, in a Sept. 25 commentary authored by Head of Public Policy and Municipal Strategy Tom Kozlik, lowered its municipal credit outlook for the public and private higher education sub-sectors to negative from cautious.

"Private institutions are currently under more strain compared to their public counterparts. However, public institutions are not immune," the commentary notes.

"Right now a lot of it has to do with revenue diversification: the smaller private schools, their revenues are so concentrated in and reactive to enrollment," Kozlik told The Bond Buyer. "That's one of the big reasons they're getting hit so hard right now."

Projections suggest that most Midwest colleges will hit an enrollment cliff in 2027, with the population of high school graduates dropping precipitously.

"Bifurcation is occurring because of these stresses? where the larger, more flexible institutions, they're the ones that are going to remain stable or improve," Kozlik said. "And the ones that are inflexible, they're the ones experiencing the credit deterioration, and they're going to continue to experience deterioration."

Investors will need to understand the specific credit fundamentals, he said, and to look at what the enrollment numbers have been and where they're going, what the multi-year plans are for those institutions at the lower end of the credit spectrum.

Merritt data shows Midwest private colleges lag other regions on metrics like median current debt service coverage. It's 1.35x for the Midwest, while the national median is 1.48x. The best region by that metric is the West: 1.58x coverage.

"If you look at profit margin during the most recent year, the worst [region] by far is the Midwest," Ciccarone said. "The best is the South, which did just a tad better than the West."

But private colleges in the Midwest have the lowest amount of long-term debt to net fixed assets, while their counterparts in the Northeast have the highest level of leverage.

The tuition discount rate in the Midwest is 49.96%, higher than the national median of 44.85%. The lowest discount rates are in the Northeast, at 42.7%, and the West, at 38%.

"What state support has allowed public institutions to do is keep their tuition lower," Fitch's Wadhwani said. "And what has resulted is, private institutions having to discount their tuition more meaningfully ? The net tuition they're able to utilize continues to moderate, and against inflation it's been negative for the last few years. That's not sustainable."

S&P's Wood said smaller privates giving higher discount rates are experiencing more pressure on operations, and noted recent data from the National Association of College and University Business Offices shows, for private universities, a market average freshman discount rate of around 50%.

She also pointed to a June 20 S&P analysis on rising covenant violations which found "institutions with weaker financial positions ? often smaller, private colleges and universities ? being disproportionately challenged" by covenant violations. In fiscal 2023, more than a dozen schools rated by S&P saw violations, most of them BBB or speculative-grade.

"There is indeed concern that colleges in these regions, especially those already facing credit troubles, could get locked into vicious cycles," Moody's Moore said. "The tight enrollment environment? could potentially cause revenue declines, as institutions ? particularly the smaller ones with a more limited, regional reach ? will use deeper tuition discounting to attract students."

Wood noted private colleges like Xavier are increasingly looking to consultants on the enrollment and demand, recruitment and expense fronts. Other schools are thinking about merger opportunities or partnerships.

"They can to some degree control their costs," Fitch's Wadhwani said. "They can identify under-enrolled programs to sunset. They can identify potential growth prospects, which Xavier has done and other schools have done? But it's also about making those tough decisions ? There's a right-sizing exercise going on. But it's challenging to grow and shrink at the same time.

"Schools are going to have to grapple with that push-pull dynamic, really, for the next decade," she added.