By Gayl Mileszko
Market Commentary
Bright College Years
May and June are, of course, the peak months for graduation ceremonies, proud moments for students, families and friends celebrating special academic achievements at the high school, college, and graduate levels. It is also the time when alumni gather on college campuses for reunions with old classmates to recall “the shortest, gladdest years of life.” Amid all the hugs, pomp and circumstance, few commencement speakers or their messages will be remembered as the years glide by. But from time to time some keynoters remain unforgettable. Such is the case this year.
Alma Mater or Hater?
In bygone days, governors, Members of Congress, superstar athletes, talented musicians, scientists, and poets, extraordinary business leaders, and accomplished alumni would give inspirational messages that were welcomed with a fair measure of awe and applause. The COVID classes of 2020 and 2021 missed the chance to have family with them to hear uplifting and encouraging words and celebrate with classmates. Since then, however, much rhetoric seems no longer worthy of the stage. Many speeches are self-congratulatory, incendiary, delivered in angry tones by orators on topics unrelated to the reasons for their invitations, expertise and renown. So, it is no longer uncommon for some students as well as the parents and grandparents who financed their $300,000 educations to walk out in disgust at remarks made by the keynote speaker or class valedictorian. Bondholders are among the many now paying closer attention to what goes on at college campuses and commencements, and what this all indicates for America, our future leaders, our policies and alliances, our nation’s creditworthiness.
Baggage Class
Since the Vietnam era, we have grown accustomed to seeing thousands of protests on college campuses. But these past two years, mass arrests, shooting threats, stalkings, diploma burning, and other disruptions have caused some commencement speakers to cancel their engagements and schools to cancel all formal exercises for safety reasons. The lack of respect and discipline, the tolerance of hate, are shocking and shameful. Reverberations are being felt in the bond markets where public and private colleges and universities have long borrowed on a tax-exempt basis. Many prestigious schools steeped in history and well regarded for academic excellence have become stormy worlds of pro-Palestinian protests. Their executive administrators were exposed in congressional hearings for their inability to simply define and adequately enforce even the most basic civil codes of conduct. Several institutions are now being targeted for massive federal funding cuts. The visas for many of their foreign students are being targeted for revocation, and no new student visas interviews are being scheduled. Much more news is to follow.
Fair Harvard
Harvard, which has about $4.9 billion of taxable bond debt and $3.28 billion of tax-exempt bond debt outstanding, with credit ratings higher than those of the United States, has seen its bonds cheapen in the secondary as some holders of the gilt-edged bonds are selling millions in order to limit their headline risk. There are still plenty of buyers but at lower prices since its tax-exempt status has been threatened. But those seeking to acquire the credit want to be compensated for several brand-new risks — now that the nation’s oldest university is in the Trump Administration’s crosshairs and lawsuits may take years to resolve. Under the House-passed reconciliation bill, Harvard’s $53 billion endowment looks to be one of less than ten that would be taxed at 21%. The current excise tax is 1.4%, so that would be a major hit. Approximately $3 billion in federal grants, the types of funds that supplied 11% of its operating revenue in FY24, have already been frozen; President Trump has proposed transferring this money to trade schools. The old maxims are “As Maine goes, so goes the nation,” and “As General Motors goes, so goes America.” These days, investors are watching to see how Harvard goes to predict the future of higher education, at least among its most elite institutions.
Finals
Thousands of students will no longer have the opportunity to graduate from the college that they entered as freshmen due to their school’s overwhelming financial problems, many of which were caused by declining enrollment. The academic year of 2024 was the last one for a host of schools with some histories going back a hundred years or more: Birmingham-Southern College in Alabama (founded 1856); the University of the Arts in Philadelphia (1876); Oak Point University in Chicago (1914); Notre Dame College in South Euclid, Ohio (1922); Clark Summit University in Pennsylvania (1932); Wells College in Aurora, New York (1938); and Goddard College in Plainfield, Vermont (1938).
Cum Laudes No More
Many academic and financial analysts are hesitant to publicly identify at-risk colleges so as to avoid self-fulfilling prophesies. But as many as 80 colleges and universities are said to be in danger of closing in the next few years. The 2025 Spring Semester was the last for Limestone University in Gaffney, South Carolina (founded 1845); Northland College in Ashland, Wisconsin (1892); St. Andrews University in Laurinburg, North Carolina (1896); Eastern Nazarene College in Quincy, Massachusetts (1918); and Fontbonne University in Clayton, Missouri (1923). Studies show that there are some 150 major factors linked to college closures, and most are financial: lack of cash reserves, high debt service costs, heavy reliance on use of limited endowment funds, negative investment returns, and low alumni giving. But there are quite a few other variables involved, such as: inexperienced leadership, no willingness on the part of trustees or faculty to change; warnings from accrediting agencies; strong local competition; admission yield and retention declines; high percentages of part-time students; low percentages of graduate students; key relationships to churches or towns seeing declining populations; changing student course of study preferences; and rising tuition discounts.
New History Classes
To avoid closure, some colleges seek to merge with other institutions. We have seen recent announcements of new strategic partnerships and integrations involving Gannon University and Ursuline College; Seattle University and Cornish College of the Arts; Marymount Manhattan College and Northeastern University; and Rosemont College and Villanova University, to name a few. These transactions typically involve the assumption of substantially all assets and liabilities by the larger institutions once state, federal, and accrediting agency approvals are granted. But not all efforts going forward will succeed given all the work necessary to integrate missions and cultures, gain support from all stakeholders, retain students, handle employee-related matters, re-brand and, most importantly, structure the most effective governance.
Degrees of Stress and Success
Moody’s downgraded its outlook for higher education in March from Stable to Negative citing the Trump Administration’s proposals to eliminate the Department of Education, cut research funding, take actions against diversity programs, reduce foreign student visas, and expand taxes on endowments. Fitch Ratings projected a deteriorating outlook citing operating pressures, rising capital needs, enrollment challenges, and the uncertain legislative environment. For the third year in a row, S&P Global noted a bifurcated sector. They see a number of strong institutions with broad geographic reach, strong brand recognition, enrollment and fundraising trends whose financial positions trend in the right direction, while those less selective, regional schools with limited financial flexibility, operating deficits, liquidity issues and increased competition are struggling.
Our Studies
At HJ Sims, we incorporate many major rating agency medians into our own independent analyses of creditworthiness and default risk. As with our analyses in other sectors of the muni market, we examine ratios of debt service coverage, cash and investments to debt and to annual operations. We also look at endowment dollars per student. It goes without saying that, in recent years, we have closely followed macro developments including major federal funding and student loan decisions. Now we focus on issues of tax-exempt status, eligibility to issue tax-exempt bonds, and reliance upon foreign students with visas that may soon be revoked. We use a broader lens in credit reviews as well as we see colleges as the backbones of many of our local economies, magnets for talent, and fantastic incubators of innovation. As many of our readers know, we are particular fans of colleges and universities that have affiliations with charter schools and senior living communities.
College Grades from AA to BBB+
Last week, the $11.6 billion calendar included several higher education financings with 30-year term bonds. The 2055 maturity in the $155 million A-minus deal for Catholic University of America priced with a 5.75% coupon to yield 5.43%. The one in the $1.2 billion Aa2 rated New York University sale was priced with a 5.25% coupon to yield 4.81%; a separate $985 million federally taxable series priced at par to yield 5.832%. Michigan State University’s $369 million Aa2 issue had its longest maturity priced at 5.00% to yield 4.84% while the $25 million BBB+ Roanoke College deal had one that came with a coupon of 6.00% to yield 5.71%. There was also a $98 million AA rated University of Kentucky project financing that priced at 5.00% to yield 5.05%.
HJ Sims Majors in Charter Schools
HJ Sims came to market last week with an $18.4 million non-rated Florida Capital Finance Authority private placement for The Jewish Academy that we structured with a 10-year final maturity priced at 7.875% to yield 8.631%. We are back in the market this week with $252 million of non-rated Louisiana Public Facilities Authority bonds: $98 million for Lafayette Renaissance Charter Academy and $153 million for Acadiana Renaissance Charter Academy. We invite you to reach out to your HJ Sims coverage for more information on these offerings as well as others scheduled for coming summer weeks.
College Credits
The municipal bond calendar this week may be one of the largest on record. Analysts estimate that between $17 billion and $22 billion of new and refunding issues may come to market. Some deals are being brought after weeks of delay due to tariff-related volatility, others are moving forward as pandemic-era funding comes to an end and new money is needed for a variety of projects. Colleges have been among the heaviest borrowers this year, taking advantage of current favorable rates to build cash reserves. This week we expect to see deals from the University of Texas, Swarthmore College, Iona University, University of New England, Colorado State University, Quinnipiac University, Wellesley College, Kalamazoo College, and the University of South Florida. University health system financings include those for Indiana, Chicago and Stanford; Palm Beach Atlantic University also has student housing deal in the market.
Today’s Syllabus
Investors are deluged with 24/7 news. Since President Trump’s swearing-in, headlines are coming hour after hour with the kind of bold type and exclamation marks once reserved for only the rarest of announcements from the White House, Congress, and Supreme Court. DOGE revelations, a never-ending series of lawsuits filed and quickly followed by controversial lower, appeal, and Supreme Court rulings, a slew of press releases from congressional committees and a constant series of alerts from lobbying organizations. Parties publish opinions on matters way outside their range of expertise or current, first-hand knowledge, and some with loud voices move markets. This week is yet another huge news week. Of late, we have seen a budget reconciliation bill pass through the U.S. House as a real squeaker. Fortunately, there was nothing significant impacting our tax-exempt market. But then the third major credit rating agency downgraded the U.S. sovereign rating to be low triple-A, and investors started to wonder about the value of these ratings in the context of business, state, city and other sovereign credits. Talk has floated of privatizing Fannie Mae and Freddie Mac and imposing – then delaying — new tariffs. Along with all traders and investors, we work to digest the latest slew of economic releases and corporate earnings reports, a new Nippon-US Steel deal, stalled peace talks, worrisome indications of Taiwan attack plans, a crypto market structure bill moving, major bank deregulation proposals being drafted, and the JP Morgan chief who just dropped his latest bombshell worry about a coming “crack in the bond market.” The May jobs market data comes out on Friday and the next Federal Reserve meeting is 13 days away; futures traders still anticipate two more rate cuts this year.
Class Leaders
Bond buyers absorb all this day-to-day news, scan the uneasy political and economic horizon, and lately decide to favor mostly shorter maturities in U.S. government and municipal debt. Index returns for 1-to-12-year tax-exempt bond maturities are positive year-to-date with the highest rated 1-to-3-year tenors up 1.39%, beating the S&P 500, Dow, and Nasdaq. The 3-to-7-year muni tenors are up 1.07% and the 7–12-year tax-exempt benchmark maturities are just a tick or two positive on the year. Taxable munis at +1.42% outperform other muni classes, although their performance falls below that of Treasuries at +2.46%, high yield corporate bonds at +2.64%, and investment grade corporates at +2.33%. Investment grade muni indices are down -1.38% through the end of May and even high yield munis are -1.09% in the red year-to-date. Commodity investors are among the happiest so far in 2025: gold is up 26% and steel is up 18%. Check with your HJ Sims representative for information on your portfolio performance and how we can help produce a better outcome of income going forward.
Top of the Class
May saw more than $50 billion of municipal bond sales, an 11-year high for that month. In June, we may see $60 billion. So far this year, the Municipal Securities Rulemaking Board counts $233 billion of issuance, 15% higher than last year at this point. Bondholders will be thrilled to have $44 billion of principal and $14 billion of interest hit their accounts in June. July will see about $49.4 billion of P&I, and August should bring another $52.2 billion. What an opportunity to reinvest in municipal bonds at prevailing levels! At this writing, the current 10-year AAA tax-exempt general obligation bond benchmark yield stands at 3.35% and the 30-year yields 4.54%.
Class of 2025
As one alma mater song reminds us, time doth quickly fly and the seasons come, the seasons go. This year will soon be half over so hurry up and reach out to your HJ Sims representative to discuss your needs and concerns, your interests and how we can help to build upon the income and accomplishments which make you most proud. We are proud of all Class of 2025 graduates and invite recent graduates to contact us for guidance as you begin these next exciting years of work and study. We approach every trading day as a graduation day for us and for our clients, and we view the year ahead as bright.