You have /5 articles left.
Sign up for a free account or log in.
Colleges and universities are using several notable strategies to manage their debt and liquidity amid the COVID-19 pandemic, but they sometimes take on long-term credit risk in doing so, according to a recent report from Moody’s Investors Service.
Low interest rates offer a chance to refinance debt, the ratings agency noted. That means colleges and universities can borrow to make investments, insulate themselves from pandemic-related budget stresses or even restructure their debt to put off principal repayments for a few years -- a strategy known as scoop and toss.
Most institutions with strong financial indicators can manage rising debt levels to take advantage of low borrowing costs, Moody’s found. But conditions might lead to credit challenges. Low interest rates can increase long-term liabilities for universities with large pension obligations, and strategies like scoop and toss can increase debt service payments in the future, potentially causing problems for institutions that don’t experience post-pandemic revenue rebounds.
“Debt across the higher education sector rose by an estimated 10 percent in fiscal 2020, up from 2 percent to 4 percent in recent years, driven by universities with strong credit quality,” said Susan Shaffer, vice president at Moody’s, in a statement. “With low interest rates, universities that tend to have high credit quality and capacity to take on added debt will continue to access the capital markets to strengthen liquidity and fund capital strategies despite COVID-19-related uncertainties. Others with less robust balance sheets are borrowing for working capital to manage through the coronavirus turmoil, which stands to increase costs later as they repay today's deficit financing, including interest, while fundamental financial weakness lingers.”
Specific credit implications depend on the strength of an institution’s governance, according to Moody’s. No matter whether it is pursuing deficit financing, restructuring debt or bolstering liquidity, management is balancing short-term benefits against long-term risks.
The way universities manage debt and liquidity offers insight into their financial strategies and ability to manage risk, according to Moody’s. However, the higher education sector is less transparent than other enterprise and corporate sectors. Many colleges and universities only provide annual financial statements instead of regular interim disclosures that are available elsewhere.
“More consistent and frequent reporting can bolster management credibility and improve market access,” the Moody’s report said.
