The Importance of University Bond Ratings

Moody's just downgraded the bond rating of several universities, sometimes even to junk bond rating. The poor financial health of a university doesn’t just affect bond investors; students are impacted as well.

University bonds have often been an attractive option for investors because, as Forbes.com points out, they are perceived as having less volatility than state general funds, they are generally tax exempt, they have endowments that serve as collateral, and very few colleges have ever defaulted on the bond. The economy has hit higher education hard, however, and many universities are fiscally struggling. As a result, bond ratings of several universities were just downgraded, sometimes even to junk bond territory. For example, Birmingham-Southern College is now considered to be a junk bond because the school had been giving out too much federal aid to students for years. That aid must now be repaid. The Birmingham News reports that some have called for the firing of President David Pollick because of this situation.
 
Moody's Investors Service, the nation’s leading bond-rating agency, investigates several factors before it issues a bond rating. Factors for universities include things like tuition income, acceptance percentages, operating costs, debts, and so on.  In a review by Forbes of Moody’s database, only four schools have received bond upgrades this year: California State University Fresno, Bryn Mawr College, Missouri State University, and University of North Carolina.
 
A university’s financial health isn’t just important to bond investors; Forbes reports that more people than ever are evaluating the financial health of a school before deciding to enroll. If an institution faces a sudden financial crunch while a student is trying to finish their degree, the student could be faced with tuition hikes, closed classes, closed libraries, limited meal plan options, and more. This not only affects the student and parents financially, it can also affect the quality of education and quality of life on campus.
 
Before deciding to invest in a university, whether it’s for bond purposes or enrollment purposes, you should do some research on the university. This includes checking out the bond rating on Moody’s site. You can register on the site for free, and this allows you to search the ratings. It would also be prudent to check out any recent news stories related to the university before you make your investment.
 
For the best information on bonds, click here.

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