(Bloomberg) -- The finances of small U.S. colleges have big problems.

The latest example: Emmanuel College, an 800-student Christian school in Franklin Springs, Georgia, that failed this month to pay investors holding $25 million of bonds. It joins Dowling College, which this year became the first municipal- bond-market borrower rated by Moody’s Investors Service to default since 2013.

Investors have put heightened scrutiny on such niche schools since Sweet Briar College in Virginia abruptly tried to shutter this year, only to be rescued by a last-minute alumna campaign. Others may not be so lucky: Moody’s estimates that the pace small college closures will triple to 15 a year by 2017, leaving bondholders at risk of seeing their investments disappear along with the school.

“There’s no reason to think that things are going to get better for these colleges, so you’d expect to see more” defaults, said Matt Fabian, a partner at Concord, Mass.- based Municipal Market Analytics. “Investors in small colleges need to be extra careful.”

Colleges are struggling to increase tuition as the pool of graduating high school seniors shrinks and students balk at taking costly loans. That disproportionately affects small, private colleges that rely heavily on tuition -- instead of endowments -- and have fewer students bear the costs, said Edith Behr, an analyst with Moody’s. For the second straight year, tuition revenue will drop for about 30% of private universities, according to the credit-rating company.

Emmanuel, a school about 91 miles northeast of Atlanta affiliated with the International Pentecostal Holiness Church, is contending with those strains. Online it touts its affordability and says nine out of 10 students receive financial aid. The college has full-time equivalent enrollment of 817 in the current fall semester, the highest since at least 2007, and annually budgets for $8.5 million in revenue from tuition and fees.

Even with the increased enrollment, the school projects that the cost of running the college, paying faculty and awarding scholarships will exceed its revenue. Thus it’s left with insufficient cash to repay investors who bought bonds issued for the school in 2012 by the Franklin County Industrial Building Authority, which helped cover the cost of new facilities.

“What we’re seeing at the most-stressed private colleges is they’re offering more and more financial aid, and that’s taking away anything they have that might earn some sort of return in the market,” Behr said. “It just becomes a losing proposition.”


Emmanuel missed its first payment to bondholders in November 2014, when $1.1 million was due, spurring a withdrawal from its debt service reserve fund to cover it, disclosure filings show.

Since then, the school has raised tuition and cut back on the discounts it offers its students, President Ron White said in a telephone interview. Emmanuel is also renegotiating contracts with vendors and cutting back on employee benefits. It has no plans to close.

The moves are part of an agreement that Emmanuel reached in July with bondholders. To give the college time to steady its finances, the investors pledged not to go after the school for their payments they’re owed until June 30, 2016, according to filings.

“We are moving forward to solve the problem, and we have the cooperation of our bondholders,” White said. Though the forbearance agreement ends in seven months, Emmanuel’s investors have signaled they’re willing to extend the pact for another year, he said. “Without their cooperation, obviously it’d be a different story.”


OppenheimerFunds owns $13.4 million of the securities, or 54% of the total, Bloomberg data show. Western Asset Management holds $7.9 million and Massachusetts Mutual Life Insurance has all $2.5 million of the taxable debt that’s in default.

Meredith Richard, a spokeswoman for New York-based OppenheimerFunds, declined to comment, as did Madelyn Dillabough, a spokeswoman for Western Asset’s parent company, Legg Mason Inc. Jim Lacey, a spokesman for Massachusetts Mutual, didn’t have an immediate comment. 

An average of five small colleges have closed each year since 2004, according to Moody’s, which defines them as private schools with operating revenue below $100 million, or public colleges with revenue below $200 million. About 2,300 four-year universities remain in the U.S.

“A college that doesn’t recruit well or doesn’t manage its resources well or doesn’t attract students is going to experience volatility,” said Reid Tomlin, director of muni research at Wasmer Schroeder, which oversees $4 billion in local debt. He said the company focuses on mostly larger, higher-rated institutions like the University of Chicago and Princeton University.

“You’re going to have winners and losers,” Tomlin said. “The colleges that don’t have the reputation and are smaller and competing for students, they’re going to be more challenged in this cycle.”

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