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Outlook For U.S. Independent Schools: Consistent Demand Trends Despite Macroeconomic Pressures


Chart 1


Our View Is Steady … For Now

During 2022, rated independent schools experienced continued enrollment growth with increasingly selective admissions and healthy demand. Although inflationary pressures on labor and wages have started to affect operations and could present financial headwinds for some, we expect most independent schools to weather the storm given solid demand coupled with tuition increases to offset revenue growth. As of fall 2021, all rated independent schools had returned to full in-person learning with boarding options, translating to improved tuition and auxiliary revenue for fiscal 2022. While financial resources remain stronger than pre-pandemic levels, investment returns in 2022 were uneven, and for fiscal 2023 returns are projected to be modest at best, which could soften balance sheets and yield cash flow pressure for schools with limited financial flexibility.

Our expectations for 2023

Based on our conversations with management teams, we expect performance to be mixed in fiscal 2023 with operating margins likely in line with those of fiscal 2022 but with balance sheet metrics possibly experiencing greater swings. Revenue growth expectations related to stable-to-growing enrollment and tuition increase projections somewhat offset rising costs, including salary and merit increases. In terms of balance sheets, market volatility remains a question mark given the recent significant swings in average investment gains and losses, which make it difficult to accurately predict effects on operating budgets and endowment. While we see greater economic challenges in 2023, we expect relatively steady creditworthiness for those independent schools with healthy demand and sound financial resource positioning. Such schools, in our opinion, have cushion at the current ratings to withstand moderate pressure and mitigate credit risks.

Chart 2


Sector Top Trends For 2023

Healthy enrollment trends across the sector.   While recessionary expectations lead to some uncertainty in 2023, trends of stable-to-rising demand for independent schools in recent years mitigate this risk and we expect demand for rated schools to remain largely unaffected. During the past two years, more than 60% of schools we rate experienced enrollment growth, with over 12% of such schools seeing growth greater than 3%. Many independent schools have benefited from rising applications and, consequently, increasingly selective admissions driven by the flexibility of programmatic offerings. While demand has been positive for independent schools overall, we will monitor how rising tuition rates affect demand for the sector, which has historically been fairly inelastic to price changes. In our view, lower-rated schools with less flexible demand will likely continue to experience uneven enrollment growth relative to that of larger and higher-rated schools.

Chart 3


International student considerations.   Although the number of international students enrolled in independent schools has largely stabilized since the onset of the pandemic, increased international conflicts and higher global economic volatility could create net tuition revenue pressure for schools that have a greater reliance on international students or could affect the international representation of the student body. Based on conversations with our issuers, leadership teams remain cognizant of balancing the appropriate student mix to support longer-term programmatic and operational goals for schools. We will monitor potential effects on student mix trends or operations in light of recent global uncertainties.

Potential recessionary environment could affect affordability, endowments, and fundraising.   S&P Global Economics reports that in 2023 the economy is likely to fall into a shallow recession tempered by moderate initial jobless claims and unemployment rates. (See "Outlook For U.S. States: Rainy Day Funds Will Support Credit In A Shallow Recession," published Jan. 5, 2023, on RatingsDirect.) Rising consumer prices and interest rates are whittling consumers' discretionary income, which could affect parents' and students' school choices and depress revenue streams for some schools, but a greater proportion of rated schools benefit from affluent contributors whose giving abilities remain unchanged. We will monitor effects on endowment and fundraising capabilities should a sustained recession suppress potential financial contributions.

At the same time, expenses, in particular salaries, are rising. Although some schools have frozen salary increases during the pandemic in search of expenditure relief, we expect they will have to budget for salary increases to match inflation and combat a more competitive job landscape. But even if recessionary and inflationary pressures outpace revenue strengths, we believe historically strong balance sheets coupled with active management to control costs will allow these relatively higher-rated schools to weather a short and shallow recession.

Elevated management turnover and national staffing shortages.   Although many schools are accustomed to periodic changes in leadership, the pace of leadership turnover has increased in recent years and we expect this may continue. This reflects a combination of the usual rotations and retirements as well as transitions out of the education sector given the broad demands and difficulties arising from the pandemic and economic effects. We do not view management turnover in and of itself as a negative credit factor; in fact, we view positively a school's ability to adjust quickly when doing so is necessary. However, frequent changes in leadership limit the ability of many schools to implement or act on strategic plans and could indicate larger institutional challenges, so we view these negatively. Despite higher turnover rates in teaching staff for national kindergarten to 12th-grade schools as a result of national teacher shortages across education sectors, most of the independent schools we rate report no issues with retaining or hiring teachers.

Role of the balance sheet in maintaining credit stability.   School reserves increased significantly in fiscal 2021, and this provided cushion against the market declines in fiscal 2022. On an absolute basis, balance-sheet metrics are generally still at or above pre-pandemic 2019 levels. Despite expectations of continued market volatility or recessionary pressures, many schools aim to maintain funds in anticipation of likely weaker cash flow and capital spending needs. We expect some schools with greater flexibility to follow through on planned capital spending, but we recognize that schools with historically lighter financial resources will likely focus on preserving reserves and thus moderate their cash flow spending. Over the next year, balance-sheet strength will continue to play a key role in credit stability given our expectation for somewhat moderate operating performance.

Chart 4


Economic impact on capital project planning.   Despite rising construction and material costs, a portion of rated independent schools have resumed capital projects that they had planned prior to the pandemic, and continue to execute on these initiatives. Nearly a third of our independent school respondents report plans for capital projects, much of which we expect they will fund through capital campaigns. We expect higher costs will remain a challenge for schools with upcoming projects or those that require maintenance of facilities. However, despite the elevated potential for a recession in 2023, fundraising for most rated independent schools has not yet weakened , and thus should continue to aid in providing for capital needs.

Tuition increases and financial aid offerings.   As schools have returned to programming similar to that of pre-pandemic years, we expect increases to tuition to balance out inflationary pressures and salary increases. While some schools provided relief in the form of higher discount rates or steady tuition rates in recent years, we expect tuition rates to increase at a good pace for both day and boarding students, which may affect financial aid offerings for institutions. Tuition increases averaged 5.5% for the 2022-2023 school year across rated schools, and we anticipate increases of 5% to 8% for 2023-2024 based on respondents.

Chart 5


Long-term financial planning is critical.   Inflation, an increasingly competitive labor market, and staffing shortages will spur higher personnel costs for schools to manage staffing needs. To combat expenditure growth, schools will likely need to increase revenue diversity beyond tuition to maintain demand metrics through affordability--for instance, by relying on greater annual giving and diversifying program or auxiliary offerings. We also anticipate that schools may need to adjust long-term financial planning, including tightening expenditure assumptions and increasing reliance on revenue growth outside of annual tuition rate increases.

Value propositions will continue to affect enrollment decisions.   Serving a socioeconomically diverse student body has become an increasingly important priority for schools, requiring greater focus on institutional financial aid and support. Some schools are reconsidering their approach to financial aid distribution through need-blind admissions or greater assistance for economically disadvantaged students, supported by generous fundraising support. Increased competition from lower-cost and high-quality alternatives requires independent schools to keep demonstrating value in a shifting kindergarten to 12th-grade environment. If independent schools face difficulties delivering on this value proposition, they might need to shift their program or mission over time to sustain demand.

Continuing progress toward access through diversity, equity, and inclusion (DEI).   Schools continue efforts to promote inclusivity and diversity across many areas of their operations. In the past few years, several schools have developed new strategic plans incorporating DEI into curriculum and initiatives, including hiring DEI officers, and are working to increase the diversity of faculty, staff, board members, and students. In addition, many rated independent schools are stepping up their efforts to attract students from diverse socioeconomic backgrounds. These efforts require investment, however, and management teams will have to consider these costs in planning. We anticipate that schools with more endowment and fundraising resources will be more effective in diversifying their student body over the next year, based on their ability to offer more financial aid.

Mitigation of event risks.   Many schools have established policies and reconfigured governance practices to address environmental, social, and governance considerations, including cases of sexual misconduct, school safety, weather-related or other event risks. For example, an increasing number of cyber security incidents has influenced schools to reinforce protections and limit financial exposure to potential threats. Greater protection against cyber threats requires greater financial investment from schools, potentially affecting financial flexibility for lower-rated schools with limited funds.

How Will Credit Quality Be Affected?

What could change the sector view?   Independent schools entered 2023 with healthy financial positions; as of Jan. 31, 2023, outlooks were stable on all rated schools. Although we expect market volatility and rising expenses, the recession that we forecast in our baseline should be shallow. Barring unanticipated pressure on demand or on the ability to fundraise, we expect the outlook for the independent school sector to remain stable.

Which issuers could come under operating stress?   We anticipate that lower-rated schools may face pressure as a result of limited operating and demand flexibility, while higher-rated issuers will see continued stability, supported by healthy demand and resources. We will monitor schools with slimmer access to financial resources, as they might have greater budgetary pressures as a result of inflation, but we anticipate general stability across the sector.

Independent School Rating Performance And Sectorwide Medians

As of Jan. 31, 2023, S&P Global Ratings had 40 independent school ratings, ranging from 'AAA' to 'BB+'. The majority of our ratings (83%) are in the 'A' category or higher; the remainder are in the 'BBB' category, with only one speculative-grade rating at 'BB+'. Overall, last year ratings were largely stable across the sector; we assigned one new rating (DePaul College Prep), raised one (Masters School), and revised the outlook to stable from negative on one rating (Garrison Forrest School). We also withdrew one rating, as the bonds were refunded.

Private placement bonds remain a popular form of financing for independent schools. In our view, this type of debt may pose contingent liquidity risk as a result of cross-default or acceleration provisions based on financial and nonfinancial covenant triggers. However, for most of our rated independent schools that have such obligations, we view these risks as manageable given the considerable funds available to them.

All five of the 'AAA' rated schools have contingent debt outstanding, and debt profiles of some rated schools consist entirely of direct placement bonds. For these schools, we assign an issuer credit rating rather than a rating on a specific debt instrument. An issuer credit rating reflects our view of the obligor's general creditworthiness, focusing on its capacity and willingness to meet financial commitments when they come due.

Chart 6


Chart 7


Chart 8


Fiscal 2022 Medians

Medians By Rating Category

Overall, medians generally tend to improve by rating category, although the small sample size and changes in our rated universe inherently result in some shifts (see table 1).

Outside of overall enrollment, which varies across rating levels, medians generally trend according to rating category. Although enrollment for 'AAA' rated issuers is lower than that for some other rating categories, other demand metrics, including freshman selectivity and matriculation rates, remain stronger at higher rating levels. Furthermore, the 'AAA' rated schools, which hold significant endowments and garner robust fundraising support, have the greatest revenue diversity with the least dependence on tuition, and greater support from investment and endowment income as well as private gifts. Conversely, the 'BBB' category schools have the greatest dependence on tuition income, with the least support from endowment and fundraising. Also, tuition discount rates are usually higher for 'AAA' rated schools because these schools have larger reserves to cater to higher discounting needs. Furthermore, given the strength of demand metrics at higher rating levels, these schools have the flexibility to have higher net tuition rates, which decreases at lower rating levels due to increased tuition dependance and higher competition for these schools.

Many other key financial ratios, in particular endowment market values and financial resource ratios, track according to rating category. However, given increased market volatility relative to fiscal 2021, endowment market values across the rating categories have reflected variable results, declining in some rating categories but remaining above pre-pandemic levels for all rating categories. Although higher-rated schools typically have more debt outstanding, their operating budgets also tend to be larger, reflecting maximum annual debt service burdens that are manageable across the rating categories. Also, capital expenses tend to be greater at higher rating levels, likely reflecting the availability of resources to support such needs as well as campuses that demand such investment. Overall, given lower frequency of issuance in the sector and growing revenue, maximum annual debt service burden as a percentage of expenditures has decreased over the past two years, providing enhanced operating flexibility for schools, in our view.

Table 1

Fiscal 2022 Medians For U.S. Independent Schools
Rating category AAA AA A BBB
Sample size 5 12 16 6
Total headcount 656 537 697 1075
Freshman selectivity rate (%) 12.3 18.6 38.4 49.0
Freshman matriculation rate (%) 70.1 65.1 64.2 64.7
Revenue diversity
Tuition dependence (%) 48.6 63.6 72.0 83.2
Investment and endowment income (%) 27.1 15.2 8.0 1.7
Private gifts (%) 9.3 8.85 8.4 2.8
Financial aid and expense ratios
Tuition discount rate (%) 31.8 25.5 23.2 16.0
Financial aid burden (%) 16.3 13.6 16.9 13.8
Instruction (%) 27.3 40.8 40.4 56.6
Endowment market values ($000s) 789,000 179,156 106,464 20,936
Total debt outstanding ($000s) 86,460 40,288 25,352 19,040
Contingent liability ($000s) 65,914 15,136 20,500 27,737
MADS burden (%) 3.93 4.34 4.49 3.39
Average age of plant (years) 13.5 14.6 15.9 14.6
Annual capital expenses ($000s) 20,249 3,618 3,169 1,752
Financial resources
Cash and investments to operations (%) 1,007.9 467.2 252.9 142.7
Cash and investments to debt (%) 1,055.2 695.0 421.9 209.5
Expendable resources to operations (%) 718.1 314.2 140.7 104.4
Expendable resources to debt (%) 739.2 366.5 208.7 140.8
Net operating income (%) (0.1) 2.2 (0.2) 2.2
Per student ratios
Net tuition revenue per student ($) 42,504 42,092 35,646 27,172
Total adjusted operating revenue ($) 127,404 88,338 62,194 37,520
Total adjusted operating expenses ($) 126,556 85,507 61,010 36,703
Total debt outstanding ($) 118,854 78,326 31,402 28,983
Expendable resources ($) 903,203 256,769 71,731 35,514
Endowment market value ($) 1,177,612 419,430 100,327 41,265
Note: Excludes 'BB' category medians as there is only one school at this rating level.

Sectorwide Medians

Despite endowment and financial resource ratio volatility related to weaker market performance in fiscal 2022, our sectorwide medians reflect relatively stable performance over the past three years (see table 2). Median headcount rebounded for the most part in the 2021-2022 school year as a result of subsiding pressures related to the pandemic, and other demand metrics have remained steady.

As a result of rising inflationary pressures, financial operating results have slightly deteriorated with median net operating income decreasing--a reflection of budgetary stresses of rising operational costs. This is also attributable to decreased investment and endowment income resulting from weakening and volatile market performance. As expected, this has also led to lower financial resource ratios and endowment market values for our sectorwide medians, with cash and investments as a percentage of operations decreasing by more than 24% from the fiscal 2021 figure, which was a record resulting from unprecedented market returns. However, as mentioned, in fiscal 2022 these metrics were higher than pre-pandemic levels.

Table 2

Sectorwide Ratios For U.S. Independent Schools
Fiscal year 2022 2021 2020
Sample size 39 40 42
Total headcount 681 686 710
Freshman selectivity rate (%) 32.6 37.5 38.3
Freshman matriculation rate (%) 65.0 65.4 67.1
Revenue diversity
Tuition dependence (%) 70.2 67.7 69.3
Investment & endowment income (%) 10.1 10.3 9.1
Private gifts (%) 8.1 7.7 6.7
Financial aid and expense ratios
Tuition discount rate (%) 24.5 24.3 22.8
Financial aid burden (%) 16.1 16.1 15.4
Instruction (%) 37.7 40.8 43.9
Endowment market values ($000s) 122,277 136,869 101,390
Total debt outstanding ($000s) 32,215 30,006 28,789
Contingent liability ($000s) 29,034 29,145 22,822
MADS burden (%) 4.14 4.87 5.22
Average age of plant (years) 15.0 14.5 14.0
Annual capital expenses ($000s) 3,662 3,611 3,978
Financial resources
Cash and investments to operations (%) 313.2 358.9 263.0
Cash and investments to debt (%) 560.6 578.5 429.3
Expendable resources to operations (%) 162.7 204.3 151.6
Expendable resources to debt (%) 308.4 354.4 217.5
Net operating income (%) 0.5 4.0 3.4
Per student ratios
Net tuition revenue per student ($) 39,641 36,321 36,127
Total adjusted operating revenue ($) 77,173 71,490 61,274
Total adjusted operating expenses ($) 74,309 66,378 59,315
Total debt outstanding ($) 46,653 41,085 39,473
Expendable resources ($) 112,892 132,958 83,141
Endowment market value ($) 173,648 182,265 122,190
Note: Does not include DePaul College Prep given its status as the only school in its rating category and its lack of a fiscal 2022 audit.
Medians over time by category

Table 3 compares medians over the past three years by rating category, reflecting that, on the whole, demand and financial metrics have been generally stable although pockets of stress remain for lower-rated issuers. Tuition discount rate medians for 'AA' and 'A' rated schools, which make up the majority of ratings in the sector, were stable for 2021 to 2022. While discount rate for schools in the 'BBB' rating level decreased for fiscal 2022, this ratio improved meaningfully for 'AAA' category schools in each of the past three years. Financial resource ratios have grown overall since fiscal 2019, but remain down from fiscal 2021 highs, as mentioned. Finally, debt levels and metrics across the sector have remained relatively stable.

Table 3

Medians For U.S. Independent Schools Over Time
2022 2021 2020 2022 2021 2020 2022 2021 2020 2022 2021 2020
Sample size 5 5 4 12 12 12 16 16 17 6 7 8
Total headcount 656 650 840 537 521 574 697 712 732 1075 697 809
Freshman selectivity rate (%) 12.3 15.5 16.1 18.6 21.5 19.9 38.4 40.5 41.9 49.0 57.5 57.4
Freshman matriculation rate (%) 70.1 71.2 73.2 65.1 65.9 66.4 64.2 65.4 67.0 64.7 55.2 59.3
Revenue diversity
Tuition dependence (%) 48.6 49.4 44.6 63.6 63.5 63.3 72.0 72.6 73.5 83.2 77.8 86.5
Investment and endowment income (%) 27.1 25.9 32.4 15.2 19.2 18.5 8.0 7.6 8.2 1.7 2.5 2.6
Financial aid
Tuition discount rate (%) 31.8 31.2 30.2 25.5 25.5 25.9 23.2 23.2 22.3 16.0 19.9 17.1
Financial aid burden (%) 16.3 16.4 15.6 13.6 14.2 15.0 16.9 16.1 16.2 13.8 16.6 14.8
Endowment market values ($000s) 789,000 863,553 875,266 179,156 212,212 166,252 106,464 100,541 80,205 20,936 51,927 28,046
Financial resources
Cash and investments to operations (%) 1,007.9 1,096.2 948.6 467.2 555.8 495.5 252.9 298.7 250.0 142.7 159.2 119.9
Cash and investments to debt (%) 1,055.2 1,329.0 1,181.2 695.0 732.2 564.8 421.9 516.3 416.3 209.5 314.1 202.8
Expendable resources to operations (%) 718.1 846.4 690.9 314.2 391.1 270.4 140.7 185.4 137.9 104.4 91.7 64.4
Expendable resources to debt (%) 739.2 1,026.2 757.2 366.5 448.2 339.4 208.7 267.8 207.7 140.8 143.3 92.3
Per student ratios
Total adjusted operating revenue ($) 127,404 123,614 113,049 88,338 84,995 82,715 62,194 58,989 55,158 37,520 44,911 37,302
Total adjusted operating expenses ($) 126,556 127,450 118,605 85,507 80,727 75,815 61,010 56,280 53,074 36,703 40,796 36,882
Total debt outstanding ($) 118,854 105,455 98,272 78,326 80,284 68,491 31,402 30,564 28,958 28,983 32,745 28,607
Endowment market value ($) 1,177,612 1,328,543 1,068,197 419,430 495,042 374,713 100,327 111,661 87,266 41,265 48,939 38,402
Note: Given sample size, no median for non-investment-grade.

Table 4

Independent School Ratings By Category As Of Jan. 31, 2023
Institution State Rating Outlook
Deerfield Academy MA AAA Stable
Hotchkiss School CT AAA Stable
Phillips Academy Andover MA AAA Stable
Phillips Exeter Academy NH AAA Stable
St. Paul's School NH AAA Stable
Groton School MA AA+ Stable
Peddie School NJ AA+ Stable
St. Andrew's School of Delaware Inc. DE AA+ Stable
Milton Academy MA AA Stable
Thacher School CA AA Stable
The Hockaday School TX AA Stable
Chapin School NY AA- Stable
George School PA AA- Stable
Hopkins School CT AA- Stable
Horace Mann School NY AA- Stable
Roxbury Latin School MA AA- Stable
St. George's School RI AA- Stable
Belmont Hill School MA A+ Stable
Emma Willard School NY A+ Stable
McDonogh School Inc. MD A+ Stable
Collegiate School VA A Stable
Kent Denver School CO A Stable
Kent School Corp. CT A Stable
Millbrook School NY A Stable
Saint Xavier High School OH A Stable
The Haverford School PA A Stable
Westminster School CT A Stable
Westtown School PA A Stable
Albuquerque Academy NM A- Stable
Ethical Culture Fieldston School NY A- Stable
Garrison Forest School MD A- Stable
Holton-Arms School MD A- Stable
Masters School NY A- Stable
Carolina Friends School NC BBB+ Stable
Dexter Southfield School MA BBB+ Stable
Germantown Academy PA BBB+ Stable
Mid-Pacific Institute HI BBB+ Stable
Thayer Academy MA BBB+ Stable
Vail Mountain School CO BBB- Stable
DePaul College Prep IL BB+ Stable

Table 5

Glossary Of Ratios And Terms
Ratio Definition
Demand ratios
Freshman selectivity rate (%) Number of new students accepted/total number of applications
Freshman matriculation rate (%) Number of new students enrolling/number of students accepted
Revenue diversity
Tuition (%) Gross tuition and fees/total adjusted operating revenue
Investment and endowment income (%) Endowment income and investment income/total adjusted operating revenue
Private gifts (%) Private gifts/total adjusted operating revenue
Financial aid and expense ratios
Financial aid burden (%) Total financial aid costs/total adjusted operating expenses
Tuition discount (%) Total financial aid costs/gross tuition and fees
Instruction (%) Instructional costs/total adjusted operating expenses
Debt ratios
Total debt outstanding ($000s) Par amount of all debt outstanding
Maximum annual debt service (MADS) burden (%) MADS/total adjusted operating expenses
Average age of plant (years) Accumulated depreciation/depreciation expenses
Financial resources ratios
Cash and investments to operations (%) Total cash and investments/total adjusted operating expenses
Expendable resources to operations (%) Expendable resources/total adjusted operating expenses
Cash and investments to debt (%) Total cash and investments/total debt
Expendable resources to debt (%) Expendable resources/total debt
Net operating income (%) Net adjusted operating income/total adjusted operating expense
Per student ratios
Net tuition revenue per student ($) Net tuition revenue/total headcount
Total adjusted operating revenue per student ($) Total adjusted operating revenue/total headcount
Total adjusted operating expense per student ($) Total adjusted operating expense/total headcount
Total debt outstanding per student ($) Total debt outstanding/total headcount
Expendable resources per student ($) Expendable resources/total headcount
Endowment market value per student ($) Endowment market value/total headcount
Net tuition revenue Gross tuition and fees less financial aid
Total adjusted operating revenue Unrestricted revenues less realized and unrealized gains/losses and financial aid
Total adjusted operating expenses Unrestricted expenses plus financial aid expense
Cash and investments Cash plus short-term and long-term investments
Expendable resources Net assets without donor restrictions plus net assets available for appropriation less (net property plant and equipment less long-term debt outstanding)

This report does not constitute a rating action.

Primary Credit Analysts:David Holmes, Houston + 214 871 1427;
Chase C Ashworth, Englewood + 1 (303) 721 4289;
Secondary Contacts:Jessica L Wood, Chicago + 1 (312) 233 7004;
Avani K Parikh, New York + 1 (212) 438 1133;
Research Contributors:Yash Chandak, CRISIL Global Analytical Center, an S&P affiliate, Pune
Arpita Ray, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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