CHICAGO (S&P Global Ratings) April 29, 2020--S&P Global Ratings revised the outlooks to negative from stable and affirmed its ratings on certain U.S. not-for-profit colleges and universities (including all related entities), due to the heightened risks associated with the financial toll caused by the COVID-19 pandemic and related recession (see tables 1 and 2). For the same reasons, S&P Global Ratings revised the outlooks to stable from positive and affirmed the ratings on certain other U.S. not-for-profit higher education institutions (see table 3).

The public and private colleges and universities affected by these actions include primarily those with lower ratings ('BBB' rating category and below), but also those entities that, in our opinion, have less holistic flexibility (from both a market position and financial standpoint) at their current rating level. Although liquidity, as measured by available resources compared to debt and operating expenses, was the primary metric assessed, an institution's overall credit profile, including draw, selectivity, matriculation rates, operating margins, and revenue diversity, was also considered. For public institutions, reliance on state operating appropriations and expectations around future funding levels was also an important part of our assessment.

A negative outlook reflects our view that there is at least a one-in-three chance that operating and economic conditions will worsen to a degree that affects the ability of the college or university to maintain credit characteristics in line with the current rating level.

We will review all ratings individually to assess the degree to which each is affected by COVID-19 and the related recession, and assess underlying financial performance. However, on a case-by-case basis, if credit metrics are upheld and economic activity resumes at a pace greater than currently expected, we could revise the negative outlook to stable on specific ratings during the outlook period.

All Rated Higher Education Institutions Face COVID-19-Related Credit Pressures

U.S. higher education providers are under pressure, and if on-campus classes can't be resumed in fall 2020, could be under greater pressure. While S&P Global Ratings' outlook on the U.S. not-for-profit higher education sector has been negative for three consecutive years now, we believe that the COVID-19 pandemic and related economic and financial impacts exacerbate pressures already facing colleges and universities. The financial impact on institutions from the loss of auxiliary revenue from housing and dining fees, and parking fees; as well as revenues from athletics, theater, and other events, is material for many. For schools with health care systems, lost revenue from cancelled elective surgical procedures could also be significant. The recently passed CARES Act will provide some budgetary relief to higher education institutions; however, despite this aid, we expect to see stressed operating budgets, the scope of which will ultimately be determined by the magnitude of lost revenues, the duration of the pandemic, fall 2020 mode of instruction, and ultimate enrollment figures.

Colleges and universities have reacted rapidly to the challenges presented by the pandemic. They have moved classes online to adhere to social-distancing rules, adjusted admission policies to accommodate disruptions to high school exams, and suspended academic conferences and travel. At the same time, many have implemented material expense cuts, including deferring capital expenditures, and imposing furloughs and layoffs, in some cases, with plans to continue to ramp up cost containment under various fall scenarios. Many colleges and universities have disclosed estimates of 2020 budget shortfalls, despite the inclusion of CARES stimulus funds. We expect that the colleges and universities we rate will face an unprecedented level of operating stress and tightened liquidity, which will worsen the longer and deeper the pandemic lasts. For fiscal 2020, and likely fiscal 2021, we believe margins will be further compressed and will be negative at some institutions, potentially weighing on their financial performance assessments. In our view, the credit pressures colleges and universities face will grow the longer campuses remain largely virtual or are governed by social-distancing rules.

Many of the colleges and universities that we rate have some headroom to absorb the impacts associated with COVID-19 at their current credit ratings, as they have built up reserves over recent years, hold solid balance sheets, and have relatively low debt levels. However, colleges and universities will face increased downward pressure on their current ratings depending on the extent to which economic disruptions associated with COVID-19 persist. If global travel restrictions are prolonged, or the imminent recession diminishes foreign students' financial means, then some could opt to study or work in their home countries instead. In our opinion, a fall 2020 with significantly fewer international students, as well as lower domestic enrollments overall, will cause serious operational pressures. At the same time, most U.S. colleges and universities depend on endowments and fundraising for a significant portion of revenues, and declining investment performance and endowment market values along with weaker fundraising results could negatively affect credit metrics during the outlook period. We assess a college or university's balance sheet strength using a measure of unrestricted financial resources, which excludes financial assets that aren't available for debt service because they are restricted for various reasons, and compare available resources (expendable resources for private institutions and adjusted unrestricted net assets for public institutions) to operating expenses and total debt outstanding. If these ratios fall significantly, we could lower our assessments of universities' financial resources and debt and contingent liabilities. We believe there will be greater pressure on those schools with limited revenue and expense flexibility, lack of liquidity or balance sheet cushion, and weaker fundraising capabilities.

As described in "An Already Historic U.S. Downturn Now Looks Even Worse," published April 16, 2020, the recession's trajectory is much deeper and faster than previously anticipated. S&P Global Economics now projects that U.S. GDP will contract by 5.3% in 2020. Although we expect the economy will begin to recover in the second half of 2020, we anticipate that the recovery will be gradual and will be constrained by some form of continued social distancing as fears persist over the continued spread of COVID-19.

Importantly, if COVID-19's effect on university revenues is transitory and offset by prudent management of expenditures and liquidity, these colleges and universities' financial profile assessments might not come under downward pressure. In addition, students who are partially through academic courses have a strong motivation to return once campuses reopen. This means revenues are deferred rather than lost forever. If, on the other hand, the duration of virtual teaching extends into 2021, we expect the financial damage will be more severe and the pressure on credit ratings will grow.

Outlook Revisions To Negative

The outlook revisions to negative on these college and university ratings reflect our belief that these issuers have less flexibility at their current rating level, and are more susceptible to financial stress that could result in lower ratings over the outlook period because they have limited financial cushion to absorb an economic crisis such as the one we are experiencing at their current rating level. In many cases, issuers with these characteristics also have more limited market positions compared with those of peers at their current rating level. The negative outlook on these ratings reflects intensifying pressure on the institutions' financial performance and liquidity, driven by lost revenue streams as well as the current and forecast economic conditions.

Several of our public and private college and university ratings have multiple bond securities, or have associated entities, with ratings that are directly linked to, and thus also affected by this outlook revision to the related institution.

Table 1

For public institutions, while almost all major revenue sources described above are under pressure, we also expect that most states will make cuts to higher education funding. While public colleges and universities have benefited from annual increases in state operating appropriations for several years now, funding for higher education still remains below pre-recession levels in certain states, and some schools are still coping with the lingering effects of funding cuts on their finances. While the impact from the pandemic and the current recession will vary greatly by state, for some schools, it could mean significant reductions in state funding. Even though the majority of public universities rely on net tuition revenue for a greater percentage of their overall budget than state funds, these state appropriations still make up a considerable portion of schools' operating budgets, and strain on these resources can have major negative impacts. Many states are facing a structural gap in fiscal 2020, and while a few have already withheld funds from higher education institutions for the remainder of the fiscal year (including New Jersey and Missouri), we believe the risk of state funding cuts and delays is much greater in fiscal 2021. While decreases in state operating appropriations will range in magnitude, we will continue to monitor state revenue projections and budgets, and any possible adjustments to state funding levels, on a state-by-state basis. As more details become available on state budgets, we could take further action on other public institutions that are not part of this outlook revision.

Table 2

Outlook Revisions To Stable

As of Dec. 31, 2019, only 3.2% of our rated colleges and universities carried positive outlooks--with this action, all have been revised to stable (see table 3). The outlook revisions to stable from positive reflect our view that previous upward momentum will likely be stunted by the broad financial challenges facing these colleges and universities due to the pandemic and recession. While we no longer think a higher rating is likely during the outlook period, we still consider these organizations' ratings stable at this time.

Table 3

Issuer-Specific Reviews Will Be Conducted

These outlook revisions reflect our view that the risks posed by COVID-19 to public health and safety, which we view as a social risk under our environmental, social, and governance (ESG) factors, could continue to pressure individual college and university enterprise and financial profiles over the near term. In our opinion, the uncertainty about the timing and duration of social-distancing directives across the country to protect the health and safety of individuals from the community spread of COVID-19 adds unprecedented lack of clarity to enrollment levels for fall 2020 as well as mode of instruction, both of which will affect tuition revenues.

We intend to review all ratings individually to assess underlying financial performance as well as the degree to which each is affected by COVID-19-related events, including the recession. This will include a case-by-case analysis of management's efforts to offset revenue declines, and in certain cases where applicable, the ability to bridge cash flow imbalances caused by the pandemic and recession.

A negative outlook is not necessarily a precursor to a rating change, so we believe it is possible that we could revise some outlooks to stable from negative as we assess risk mitigation; however, we could also lower ratings during the outlook period.

As of today, S&P Global Ratings had 436 public ratings on U.S. private (287) and public (149) colleges and universities, which are secured by a general obligation or the equivalent. Our U.S. higher education ratings range from 'AAA' to 'CC', with approximately 41% of our ratings in the 'A' category, and 31% rated 'BBB+' or below. Approximately 8% of our rated universe is in the speculative-grade category. Both the lower investment-grade ('BBB') rating category and non-investment grade categories ('BB+' and below) have grown over the past few years, as more regional institutions have been increasingly challenged by enrollment and operating pressures.

As of Dec. 31, 2019, only 9.2% of our rated higher education institutions carried negative outlooks. Year to date and inclusive of these outlook revisions today, that percentage has risen to 38%.

Certain Not-For-Profit Higher Education Institutions Excluded From These Outlook Revisions

We have excluded from this rating action 50 not-for-profit colleges and universities that already carry a negative outlook prior to this event-driven outlook revision (see table 4).

Table 4

During the next few months, as we have more visibility on the mode of instruction for fall, and what enrollments look like, we will continue to evaluate the remainder of our portfolio and may take further actions on specific issuers or groups of issuers as more details become available.