(Bloomberg) — Investors are snapping up bonds sold by colleges with near-junk credit ratings in a push for higher-yielding assets — even as concerns linger about the challenges facing small, private institutions.
When Emerson College in Boston sold $88 million of debt in early January, the BBB+ rated deal received more than $900 million in orders from 26 different investors. And BBB- debt sold by Houston Christian University last month has climbed in the secondary market, indicating strong demand. Bonds due in 2054 traded in late February at an average spread of 98 basis points above top-rated debt, much lower than the 148 basis points spread the bonds initially priced at earlier that month.
That demand comes as riskier municipal bonds have outperformed the broader state and local bond market this year, according to Bloomberg index data. But buyers say they have to pick and choose with hypervigilance given that the institutions are confronting a demographic cliff from a smaller pool of would-be students and choking economic conditions that have pushed many to the brink.
“Wide spreads and new credits are tempting with pent-up demand in high yield funds, but buyer beware,” said James Pruskowski, chief investment officer at 16Rock Asset Management. “The risks are real, so we’re treading carefully.”
High-yield muni funds, which can buy BBB debt, have seen consistent weekly inflows so far in 2025, according to LSEG Lipper Global Fund Flows. Investors may see the lower-rated colleges as being a somewhat safer bet within higher education. Emerson, for example, is contending with enrollment declines but it is also a well-known institution with alumni like TV personality Jay Leno and actress Jennifer Coolidge. Its assets total more than $1 billion.
Some schools have folded under the economic and demographic challenges. The University of the Arts in Philadelphia, the College of Saint. Rose in Albany and Notre Dame College in Ohio have all shuttered in the last 12 months, affecting more than $100 million of muni debt. Federal Reserve of Philadelphia research predicts rising competition and increasing costs will force as many as 80 additional schools to close in the coming years.
Investors have been able to use the distress to win concessions from struggling colleges. Dominican University New York, for example, was recently able to secure a $34 million loan from Fundamental Advisors LP to replace an upcoming bond payment that was posing a major threat to the struggling school’s finances. Fundamental required that Dominican hand over a mortgage claim on its $52.6 million campus and agree to include a so-called enrollment covenant in the debt terms.
“As investors look through fundamental credit on potential transactions, they may choose to request additional protections,” said Yaffa Rattner, the head of municipal credit at Hilltop Securities Inc. “That could include a debt service reserve fund or a mortgage to provide additional protection in an adverse scenario.”
Not all investors are throwing caution to the wind. An $86 million sale this week by the University of Dubuque — a small, Presbyterian college in eastern Iowa — included a 10-year security that priced with a yield 150 basis points above top-rated securities. That’s about 0.65 percentage points higher than the penalty on 10-year bonds sold by the school in 2021, meaning that investors are requiring a higher payout to compensate for the risks associated with the deal. The school’s revenue bonds were downgraded to BBB- from BBB by S&P Global Ratings in January, ahead of this week’s bond sale.
About $65 million of the debt sale will go toward a new college of osteopathic medicine, scheduled to open in 2028. The remaining $21 million will outfit the university’s aviation learning center with upgrades like a larger hangar, more classroom space and new flight simulators.
Tom Hogan, vice president for university relations at Dubuque, said the new medical school will build on the university’s nursing and physician’s assistant programs and help address a national physician shortage. The university’s aviation program has been another area of strength, where enrollment has grown by 60% since 2019. “Based on potential investor meetings, we have received favorable support,” Hogan said in an email ahead of the sale. “Interest by investors has been very strong.”
Still, the school’s declining enrollment, small headcount and shrinking application pool pose a challenge to the University of Dubuque, according to a report from S&P.
“You have to be very thoughtful about small universities,” Mark Paris, senior portfolio manager and head of municipals at Invesco, said in an interview. “Some of the small liberal arts schools are under a lot of pressure. Places that have low endowments, high tuition, low enrollment or places that are changing the way they take in students are definitely of concern.”
–With assistance from Amanda Albright.
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