Moody’s Investors Service reported this month that it has a negative outlook on the higher education sector in the U.S. for the next 12 to 18 months, meaning that negative ratings actions are more likely.

That projection is a continuation of Moody’s recently dour take on the sector. The credit ratings of nearly 40 four-year colleges and universities have been downgraded since July 2013, compared to nine upgrades among the 500 or so higher education institutions tracked by the service, according to the Washington Post.

Moody’s opinion matters because its analysts look at the financial bottom line, not the intangible measures of prestige that factor into other attempts to measure or rank colleges and universities. Among the metrics that are important to Moody’s: full-time equivalent student enrollment; tuition revenue and average donations per student; total cash, investments, and debt; and debt-to-operating-revenue ratios.

According to the Washington Post analysis, 398 of 509 four-year colleges, universities, and university systems were deemed to have minimal to low credit risk by Moody’s. Twenty-three schools received a top rating, 93 schools received a moderate risk rating, and 18 schools were deemed to have substantial to very high risk.

Here are some recent examples of the downgrades of colleges by Moody’s. One common theme is declining or downward-trending student enrollments. 

Howard University

Howard University’s credit rating was downgraded earlier this month for the second time in a year. Moody’s set the Washington, DC, school’s credit rating at its lowest for investment grade debt, indicating a moderate credit risk for investors.

Why the downgrade? The historically black university’s teaching hospital had an estimated $37 million operating loss for the fiscal year ending June 30. Overall, Howard has $840 million of revenue per year. Also, Howard is in a leadership transition following the sudden resignation of Sidney Ribeau last fall, which makes it difficult for the university to plan and execute its strategies, according to Moody’s. One of those strategies may be bringing in an outside partner to help run the hospital. 

Enrollment dipped 5 percent in 2012, but partly rebounded in 2013. Can newly appointed President Wayne A.I. Frederick, a cancer surgeon with three Howard degrees, right the ship?

Siena College

Moody’s gave Siena College in Loudonville, NY, a negative rating outlook late on May 23, while at the same time affirming the college’s A3 rating on $54 million of revenue bonds.

On the plus side, Moody’s analysts reported, Siena has a modest amount of leverage, healthy unrestricted reserves, solid debt service coverage and conservative debt structure. Moody’s also praised Siena’s management as “strong,” and said the team budgeted to contain expenses in the face of a planned decline in enrollment and pressures on net tuition revenue.

On the negative side, the college has a regional market draw, with limited geographic diversity and a declining number of high school graduates in the region. That has helped pushed down enrollment by 5%, to 3,124 students, since the fall of 2010.

Also, as net tuition revenue has failed to increase, because Siena relies heavily on student charges, the college’s operating performance has narrowed, and its 2014 fiscal year is likely to be closer to break-even. As revenue growth continues to be constrained over the next few years, the college will have to cut expenses more to regain positive operations, according to Moody’s analysts.

Another negative: Prior investment losses and the use of reserves to fund capital projects depressed financial resource growth relative to peer colleges. Siena has $156 million in cash and investments, below its 2007 peak of $166 million.

Morehouse College

On May 13, Moody’s downgraded its rating on $40 million of bonds issued by Morehouse College in Atlanta, GA, along with a negative rating outlook for the college.

On the bond ratings downgrade, Moody’s reported that Morehouse has insufficient cash flow from operations to cover its debt service. Its liquidity is also low because of extraordinary draws from its endowment to fund operations and debt service. And its enrollment has been declining, and the low net tuition per student, $13,288, reflects an extremely competitive and narrow student market, Moody’s says.

Another negative: The college’s dependence on funding from the federal government, including financial aid, increases its vulnerability to changes in financial aid funding requirements and other policy shifts. If the college is unable to improve cash flow and debt service coverage, or if liquidity or enrollment declines further, Moody’s may downgrade the credit rating again.

On the plus side, Morehouse is one of the nation's leading historically black colleges, and with solid gift support — an average of $12.2 million in gift revenue for the 2009 through 2013 fiscal years. Also, the college is under new leadership, with plans to implement new strategies to grow enrollment and manage operations, which could stabilize its performance and balance sheet.

Another positive is the fact that Morehouse has a conservative debt structure and no plans to add debt.

Glenville State College

On June 12, Moody’s downgraded the credit rating for the $4 million in rated debt of Glenville State College in West Virginia and gave the college a negative outlook. Both the downgrade and the negative outlook were due to the college’s extended period of fiscal stress, elevated leverage, and not enough liquidity to cover $25 million in bank debt, Moody’s reported. Also, the college has had negative operating margins and a steeper than expected drop in enrollment, with continued enrollment pressure likely.

In the plus column for Glenville State, according to Moody’s: the state gives the college consistently strong support for funding operations, student financial aid and capital projects. Also, the college is an economic driver for the county and essential for providing post-secondary education in the traditionally underserved Appalachian region. 

Conclusions

It its sector outlook for higher education, Moody’s reports that its negative take is based on limited revenue growth and increasing completion. Tuition revenue growth will be pushed down by affordability concerns, political pressures to limit tuition increases and competition for students. Most universities won’t be able to achieve 3% annual growth in operating revenue, which Moody’s says is the minimum sustainable growth rate, and currently about 10% of universities with credit ratings are experiencing acute financial distress.

For the optimists, Moody’s has pointed to a few points of hope. Demand for higher education is expected to be strong over the longer term, particularly for associate and master’s degrees. The earnings premium for college graduates versus high school graduates aged 25 to 32 is rising, fueling demand. Equity market returns will fuel increased endowment donations. And declining household debt, which peaked in 2007, will translate to a greater willingness to invest in education.