Two private California universities downgraded amid sector challenges

Moody’s Rankings downgraded two private universities in California this week as higher education continues to grapple with declining enrollment and slower revenues nationally.

Moody’s cut the University of La Verne’s rating to Baa1 from A Thursday, affecting $101 million in revenue bonds issued for the varsity in eastern Los Angeles County. It downgraded the University of San Francisco’s rating to A3 from A2 on Monday and likewise revised its outlook downward to negative from stable, affecting $302 million in outstanding debt.

Each schools have been impacted by enrollment declines, however the University of San Francisco, a Jesuit university, was dinged by Moody’s for “uneven admissions strategies and resulting operating deficits,” which analysts said reflect challenges in financial strategy, risk management, management credibility and track record. All of those criteria are governance considerations under Moody’s ESG framework and drivers of the rating motion, Moody’s said.

“It’s hard to assign an outlook to a sector that has a whole lot of variables and pieces to the sector,” said Emily Raimes, a Moody’s Rankings associate managing director.

While USF is protected by its size and graduate programs, its admission strategy contributed to its decline in enrollment in addition to the competitive environment within the state, said Deborah Roane, a Moody’s vice chairman and senior credit officer. Only 8.6% of the scholars admitted resolve to attend, which is a low number, and speaks to the competitive environment, Roane said.

USF had 8,808 full-time equivalent students in fall 2023 and $409 million in operating revenue for fiscal 2023, in line with Moody’s.

Within the University of La Verne’s case, the enrollment declines resulted in a drop in net tuition revenue “resulting in continued narrower operating performance than historical averages,” the report said.

Moody’s revised its outlook on La Verne to stable from negative at the brand new, lower rating.

The University of La Verne is about 35 miles east of Los Angeles. Originally founded in 1891, it had 5,411 total full time equivalent students for fall 2023, in line with Moody’s.

College enrollment nationally has fallen 7.4% over the past decade, for a 1.5 million drop in student numbers, in line with a report from Best Colleges.

The highly competitive student market in California, which incorporates many strong public systems and personal alternatives in addition to a price-sensitive student population and evolving consumer preferences, will proceed to function barriers to sustainably restoring net tuition revenue growth at La Verne, Moody’s analysts said.

Moody’s revised its higher education sector outlook to stable from negative in December, predicting the mismatch in revenue and expense growth would moderate. In its forecast, Fitch was less optimistic projecting enrollment and financial challenges would intensify in 2024, which “could weaken operating margins and strain financial flexibility.”

“When it comes to the stable outlook, it’s hard to assign an outlook to a sector that has a whole lot of variables and pieces to the sector,” said Emily Raimes, a Moody’s associate managing director.

“We have now portions which are doing very well, portions which are doing wonderful and portions which are challenged,” she said.

“For big public universities, very selective, and small private universities, enrollment is doing wonderful, and can proceed to do wonderful, but there’s a portion of the sector that is still challenged,” Raimes said. “Small, private colleges, particularly those not at the highest tier, are expected to proceed to experience enrollment challenges.”

S&P Global Rankings in its 2024 forecast in December assigned a bifurcated outlook with strong institutions expected to do well and fewer selective colleges facing challenges.

Moody’s outlook doesn’t necessarily speak to the variety of upgrades vs downgrades, it speaks to the sector’s overarching business conditions, Raimes said.

Almost half of Moody’s outlook revisions on higher education credits improved, Raimes said, but 90% of rating actions were downgrades, and only 10% were upgrades.

“Our view [ahead of the outlook release] was that we had hit the trough for higher education when it comes to business conditions, but while it was still challenged, conditions weren’t getting worse, and overall, we largely still imagine that.”

The forecast report had predicted that expenses would outpace revenues again bringing one other hard 12 months, but that the gap would start narrowing, Raimes said.

But there even have been unexpected developments just like the pro-Palestinian protests and student financial aid delays, she said.

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