Guilford, Earlham College finances rated “Negative”

The financial outlook for two Historic Quaker colleges has taken a serious tumble.

Guilford College in North Carolina and Earlham in Indiana, have been moved down from “stable” to “negative” status by Standard & Poors, a financial/credit rating agency.

In an April 29 statement, the agency said, “S&P Global Ratings revised the outlooks to negative from stable and affirmed its ratings on certain U.S. not-for-profit colleges and universities . . . due to the heightened risks associated with the financial toll caused by the COVID-19 pandemic and related recession.”

However, the unexpected pandemic’s impact was not the only factor considered. S&P added that

“colleges and universities affected by these actions include primarily those with lower ratings (‘BBB’ rating category and below), but also those entities that, in our opinion, have less holistic flexibility (from both a market position and financial standpoint) at their current rating level. Although liquidity, as measured by available resources compared to debt and operating expenses, was the primary metric assessed, an institution’s overall credit profile, including draw, selectivity, matriculation rates, operating margins, and revenue diversity, was also considered. . . .

A negative outlook reflects our view that there is at least a one-in-three chance that operating and economic conditions will worsen to a degree that affects the ability of the college or university to maintain credit characteristics in line with the current rating level.”

Earlham College in Richmond Indiana was on a separate list of 50 colleges that S&P specifically excluded from the new list because, they said, the fifty schools “already carry a negative outlook prior to this event-driven outlook revision.” [Emphasis added. ] Earlham undertook substantial budget and staff cuts last year.

S & P noted that the impact of the pandemic on the hundreds of colleges and universities it monitors has been both sudden and massive:

As of Dec. 31, 2019, only 9.2% of our rated higher education institutions carried negative outlooks. Year to date and inclusive of these outlook revisions today, that percentage has risen to 38%.”

While the abrupt quadrupling of its tally of virus/recession threatened schools is shocking, S&P pointed out that financial strains were already visible at many U. S. colleges:

 “Our U.S. higher education ratings range from ‘AAA’ to ‘CC’, with approximately 41% of our ratings in the ‘A’ category, and 31% rated ‘BBB+’ or below. Approximately 8% of our rated universe is in the speculative-grade category. Both the lower investment-grade (‘BBB’) rating category and non-investment grade categories (‘BB+’ and below) have grown over the past few years, as more regional institutions have been increasingly challenged by enrollment and operating pressures.

S & P ratings deal with general credit-worthiness. But what about the immediate future?  In particular, what about the fall term?  Of the two Quaker colleges, Guilford announced just last week that

Guilford is moving forward with plans to open campus and provide in-person instruction for fall 2020.

Many details need to be worked out in the coming weeks, but the College is looking ahead with eager anticipation. Most importantly, Guilford is committed to pursuing the safest, most responsible way to re-open campus.

“It will be a thrilling reunion when we welcome our students, faculty and staff back to campus,” says President Fernandes. “There is lots of work ahead of us to reach that reality, but we eagerly embrace the challenge. Our overriding and uncompromising priority, of course, is to ensure the health, safety and well-being of everyone in the Guilford community.” 

Guilford’s Public Safety Director Jermaine Thomas will lead the College’s Health and Safety Task Force, Fernandez said. The task force is charged with enacting all necessary measures to safeguard the entire Guilford community and all campus facilities — in strict compliance with CDC guidelines and with direction from local, state and federal government authorities.  But details of any on-the-ground changes are yet to come.

Many observers foresee big challenges in college re-openings. A higher education blogger in Greensboro put it this way:

The Gordian knot that colleges and universities are trying to untangle is this:

How do you enforce social distancing on a college campus, one of the most crowded spaces in modern America? College campuses are dense by design.

It’s one thing to try to dodge other shoppers at the grocery store. It’s completely another to steer clear of other people in a lecture hall, student center or cafeteria.

A Washington Post higher ed writer put it this way on  Twitter: “ I have a hard time wrapping my head around the idea of enforced social distancing in fall among 17-21-yr-olds who, right now, are starved for contact with friends and ANY social life.”

Many football fans are itching to see college contests resume in the stadiums. But personally, I think the more compelling, and significant action this fall will be elsewhere on campus.  To S&P, the horizon looks like this:

. . .colleges and universities will face increased downward pressure on their current ratings depending on the extent to which economic disruptions associated with COVID-19 persist. If global travel restrictions are prolonged, or the imminent recession diminishes foreign students’ financial means, then some could opt to study or work in their home countries instead.

In our opinion, a fall 2020 with significantly fewer international students, as well as lower domestic enrollments overall, will cause serious operational pressures. At the same time, most U.S. colleges and universities depend on endowments and fundraising for a significant portion of revenues, and declining investment performance and endowment market values along with weaker fundraising results could negatively affect credit metrics during the outlook period.

As financial market analyst Yves Smith put it on the blog Naked Capitalism:

Needless to say, this [S&P report] isn’t cheery reading. While the universities set themselves for a big fall, a lot of people who had nothing to do with the bad policies will get hurt.

One thought on “Guilford, Earlham College finances rated “Negative””

  1. My wife is a member of the Furnas family which was long associated with Earlham College. I have visited several times, my father in law Paul Furnas attended there, and I am very sorry to hear of this turn of events and I wish the best to the current staff and students of Earlham College.

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