Recently, Moody’s Investor Services, the credit-rating company, released a new report on the higher education industry. Its outlook for the U.S. higher education sector is negative. No surprises here. Yet some may be surprised to learn that, in Moody’s judgment, approximately 10% of the public and private rated universities rated by them are “experiencing acute financial distress due to falling revenues and weak operating performance.”
That’s a large number of schools to be on the financial ropes. And I wouldn’t be surprised if the number grows, particularly when we have a stock market correction that cuts into their endowments and the balance sheets of families of prospective and current students.
I also wouldn’t be surprised if Moody’s is understating the number. But I confess part of that comes from my skepticism in Moody’s ability to assess risks well. History has shown that, if anything, Moody’s understates risks (e.g., its rating of junk bonds as AAA leading up to the 2008-09 financial crash).
I’m also a bit skeptical because of my own experience with Moody’s. They have some smart people working for them to be sure, but I’m not certain they have any people with operational experience. They don’t always ask the right questions or pursue the right leads.
Finally, I think Moody’s is far better at looking in the rear view mirror than looking around the corner in the road ahead. The situation had turned negative long before Moody’s spread the word. There are two possible explanations: they didn’t see it coming or they’re more concerned with catering to their client base (those who issue and market bonds).
In any case, Moody’s is now sounding the alarm about higher ed, which should be relevant to two groups of people: those who purchase bonds issued from one of the financially precarious institutions and prospective students. It’s the latter group that concerns me. Continue reading