Investors in the municipal bond market space might want to exercise caution when investing in municipal bonds backed by small private colleges and universities. That is not to say they are all bad, since there certainly are financially stable schools that back today’s municipal bonds. However, bond buyers should take notice on account of the recent wave of bond backed school bankruptcies at schools like St Catherine’s College in Kentucky and Dowling College in New York.
The national decline in the number of graduating high-school seniors, rising student debt, a difficult job market for graduating students and new technologies offered by online student programs are a few of the challenges small private schools face. Not to mention the soaring costs and faculty pension obligations these small institutions need to keep up with. Some schools like Georgian Court University in New Jersey which had been a single-sex school since 1908 met the challenge by deciding to go co-ed. Other schools may not be as fortunate considering their locations and demographics.
Investors can potentially eliminate some of the risk by knowing what is actually backing their municipal bond. Is the bond backed by physical collateral through a first mortgage lien on the schools assets such as the land and the buildings? Or is it a gross lien on the revenues of the school which may provide less security in a default scenario if the college is no longer in operation? Also, does the college bond carry bond insurance which may help in the recovery of principal and interest in the event of a closure?
Schools such as Regent University in Virginia, Yeshiva University, Bard College, Pace University, and the College of New Rochelle in New York all which have issued municipal bonds have lost their coveted investment grade ratings and have been pushed into the municipal junk bond pile.
Sticking with top rated Ivy League school bonds should be considered as a building block of investors portfolios, Harvard, Princeton, and Yale all carry AAA Moody’s ratings as of today.
Consulting with an experienced municipal bond portfolio manager can help eliminate some of these risks by understanding the nature of the collateral and the financial health of a particular issuer.