Black Colleges With Boosted Ratings to See Borrowing Costs Drop

A surge in enrollment and donations at Historically Black colleges and universities is leading to credit upgrades, potentially reducing borrowing costs from a bond market that has long discriminated against the schools.

(Bloomberg) — A surge in enrollment and donations at Historically Black colleges and universities is leading to credit upgrades, potentially reducing borrowing costs from a bond market that has long discriminated against the schools.

Moody’s Investors Service last week upgraded North Carolina Agricultural & Technical State University to a higher credit tier and improved its outlook on Howard University. Fitch Ratings Inc. upgraded Texas Southern University in Houston last month.

Higher credit ratings could lower costs for HBCUs, which have typically paid more than other schools with similar credit profiles and have been underfunded for much of their history.

HBCUs are seeing an increase in enrollment even as undergraduate numbers decline nationwide, coinciding with racial justice movements over the past several years following the police killing of George Floyd. The Supreme Court’s ruling last month that effectively barred universities from using race as a factor in admissions could bring even more students to HBCU campuses.

“Often times the revenue sources are precarious,” said Matthew Wynter, research professor of finance at Stony Brook University, who co-authored a paper last year that showed racial discrimination increases costs of borrowing from the municipal-bond market. “Being able to access capital markets are crucially important for an HBCU.”

Undergraduate enrollment at HBCUs grew 2.5% this fall, driven by a 6.6% increase in first-year students, according to the National Student Clearinghouse Research Center. By contrast, undergraduate enrollment nationally declined by 0.6% in the same period. 

There are about 100 HBCUs in the US with different financial profiles, half of which are public schools, according to the US Department of Education. 

A 2018 study showed that HBCUs pay higher underwriting fees to issue tax-exempt bonds — compared with similarly rated non-HBCUs — reflecting steeper costs of finding willing buyers, even when considering credit quality, the size of the offering and maturity. 

These structural deficits won’t change overnight, even with improved credit ratings, said William Mayew, a professor of business administration at Duke University who co-authored the study.

A ratings upgrade by Moody’s in 2021 likely helped Alabama State University in Montgomery secure better interest rates and attract more investors, said William Hopper, vice president for business and finance at the institution. The upgrade came as the school received funding from several federal Covid-19 programs. It was also among 45 HBCUs to have $1.6 billion in loans forgiven in 2021 from a federal program that provides low-cost capital to improve their facilities.

Moody’s boosted its rating on North Carolina A&T and its outstanding general revenue bonds to Aa3 from A1. 

When assessing credit quality for colleges and universities, Moody’s looks at metrics including enrollment, increased funding and improved state and federal support, said Susan Fitzgerald, senior vice president at the firm. Some of the recent upgrades to HBCUs by Moody’s were fueled by gifts from donors and a surge in enrollment, she said. 

North Carolina A&T in Greensboro is the largest four-year HBCU by enrollment in the US, with more than 13,000 students, according to the Education Department. Enrollment at the university rose 11% over the past five years. 

Boosted by growing donations — including a $45 million gift from philanthropist MacKenzie Scott — total cash and investments have almost tripled since fiscal 2017 to more than $400 million in fiscal 2022. This has increased the university’s financial flexibility and strengthened its operating performance, the ratings company said. 

Moody’s also assigned the university’s proposed $59 million general revenue bonds — which will fund a 413-bed residence hall — an Aa3 rating. Robert Pompey, the university’s vice chancellor for business and finance, said he received interest from 16 underwriters for the upcoming debt sale, the most in his 15 years in the position.

“There’s demand from the industry,” he said. “They’re definitely interested in working with NCA&T. It says a lot.”

Pompey expects borrowing costs to be lower on the debt because of the new rating. The savings can be used to help maintain existing dorms, he said. 

‘First Step’

Howard University, meanwhile, anticipates the projected growth in its endowment could help lower borrowing costs, said President Wayne A.I. Frederick. The university’s endowment, which is currently valued at $923 million, making it the richest historically Black university, is expected to reach $1 billion by the end of the fiscal year, he said. 

Moody’s revised Howard University’s outlook to positive from stable last week, affirming its Ba1 rating. While a change in outlook by the company doesn’t necessarily mean the credit rating will be revised, it speaks to the likely direction of an issuer’s rating over the medium-term. 

“There’s more sensitivity around the role that we play,” Frederick said. “As firms look at us, how they evaluate our potential as well as our impact may be different from how it has been in the past.”

Because HBCUs serve such a distinctive role in educating underrepresented minority students, the effects of rating upgrades that help complete projects like building new dorms or updating facilities can be massive, Stony Brook’s Wynter said.

“By no means does that solve the challenges of having unequal treatment within the financial markets,” Wynter said. “But it’s an important first step.”

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