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Debt ratings at U.S. universities to see volatile 2013 -S&P
February 25, 2013 / 10:26 PM / in 5 years

Debt ratings at U.S. universities to see volatile 2013 -S&P

NEW YORK, Feb 25 (Reuters) - Many U.S. universities could face a volatile year in terms of financing in 2013, with a major credit ratings agency saying it expects to issue more ratings changes in the not-for-profit higher education sector this year.

Standard & Poor’s Ratings Services, in a report on Monday, described a sector that was facing both risks and opportunities as institutions strive to reassess programs, delivery systems, cost structures and revenue sources.

Changes to the debt ratings will be evenly split between positive and negative, with the negative concentrated in lower-rated institutions and the positive concentrated in higher-rated universities, which have established demand, more revenue diversity, fundraising experience and strong balance sheets.

This could mean that institutions with weaker credit profiles fall further behind while those in already strong positions do even better, the agency said.

“While we expect stable credit quality for a majority of our rated higher education institutions in 2013,the range of risks facing the sector could lead to uneven credit performance,” the report said.

Money managers who buy debt issued by universities use credit ratings to make decisions about how risky the debt is and whether or not to buy it. A lower rating typically means higher borrowing costs.

Higher education has been a stable sector when it comes to debt. Less than 10 percent of public and private universities rated by Standard & Poor’s carry a “non-stable” outlook. About 5.5 percent have positive outlooks and 4 percent are negative.

However, that could start to shift in 2013. After an initial round of cost-cutting after the recent recession, budgets have been strained by flat to declining enrollments at some universities and falling tuition revenue, Standard & Poor’s said.

On the revenue side, Standard & Poor’s said it will closely follow tuition trends, grants and research funding, endowment spending, state operating appropriation trends, and fundraising - the biggest revenue sources for most institutions.

“Management must grapple with decisions regarding tuition rate increases, how to manage the combination of financial-aid strategies, new enrollment, and marketing initiatives. Long-term, these decisions could change the mission or culture of an institution,” the report said.

Balance sheets across the sector could see more weakening as universities push delayed capital investment projects as they try to stay competitive. “In our view, this means the sector will likely take on additional balance sheet risk during the next several years,” the report said.

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