AMSTERDAM (Reuters) – Universities, while waiting to see how the coronavirus pandemic will affect overseas enrollments and government grants, have embarked on a bond market borrowing frenzy this year that outpaces the upside sales of corporate bonds.
The COVID-19 crisis threatens to redefine higher education around the world, with students sent home and courses transferred online. But the economic fallout will also affect university finances, as tuition fees, especially for international students, are likely to decline while government funding could also be affected.
Yet that hasn’t stopped investors from lending to universities at historically low rates. And institutions have rushed to capitalize on the availability of cheap finance.
University bond issuance is only a tiny fraction of the global bond market, but sales by universities around the world are more than double 2019 levels, at $ 11.4 billion year-to-date of the year, according to Dealogic data.
By comparison, global corporate debt issuance accounts for around 75% of 2019 volumes, according to Dealogic data.
Chart: Global bond sales by universities and colleges in 2020 here
“We’re seeing a lot of what we call pull-forward shows,” as universities brace for another fall lockdown, said Fitch analyst Emily Wadwhani, who specializes in funding for the Higher Education.
Among those to be issued was the AAA-rated University of Virginia, which raised $ 600 million in July to fund projects such as new dormitories. It paid a return of 2.256%, the lowest on record for a 30-year “taxable” college issue.
Taxable corporate debt attracts a larger pool of investors than municipal bonds, another source of funding for American universities.
“The market was incredibly good. We have both capital needs (current and future), but we also thought that if we could get into the market, we could advance funds, ”said JJ Davis, COO of the University of Virginia.
“At these prices, why not you?”
While U.S. universities have recorded 24 transactions since the start of the year, according to genealogical data, institutions in Canada, Brazil, Singapore and Australia have also sold bonds.
The publicly disclosed university bond market is about $ 50 billion and up, according to Dealogic.
Of that amount, $ 36.3 billion comes from US universities, which typically enjoy a lower level of state support than their European counterparts.
Existing academic issues, especially those of big names like Oxford and MIT, have contributed to the broader bond market rally this year. Yields on the S&P Municipal Bond Higher Education Index fell to 2.7%, nearing record lows.
‘A AND DON’T-NOT’
The coronavirus crisis could widen the gap between top and lesser-known universities. This year’s borrowers are mostly blue chip names such as Virginia, Harvard, and Stanford.
“The market is starting to distinguish between the haves and the have-nots,” said Cooper Howard, director of bond strategy at Charles Schwab, which manages $ 3.25 trillion in assets.
Credit rating agency Moody’s said in a March report on higher education in the United States that the outlook for the United States education sector was turning negative from stable.
“For the 2021 fiscal year, universities face unprecedented enrollment uncertainty, risks to multiple revenue streams, and potential significant erosion of their balance sheets.”
Even university issuers with high credit scores had to show investors how they were going to cope with the pandemic.
“(The issuers) have done a ton of work around stress scenario analysis,” said a US banker involved in some of the transactions.
He said 30 to 40 universities with lower credit scores were waiting for clarification on admissions and tuition fees before issuing debts.
UK universities, already facing a further complication of Brexit, have been absent from fundraising through the bond market this year, although they often favor hard-to-follow private placements.
The bond financing dialogue collapsed amid spring uncertainty, said Fraser Dixon, head of UK and Ireland debt capital markets at JPMorgan, which organized Oxford’s first bond deal in 2017.
Financial pressures are increasing. A report from the University and College Union – the union for academic staff in Britain – has predicted that UK universities will lose £ 2.5 billion next year in tuition fees alone.
And in the United States, student enrollments will decline by 5-20% this year, Fitch predicted.
“It’s certainly difficult to judge what the college experience might look like in the future,” said Dixon of JPM.
Reporting by Yoruk Bahceli; edited by Sujata Rao and Jane Merriman
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