This Week in College Viability Special - with Ann Rutledge Jan 18, 2024

Gary (00:03.862)
Welcome to a special edition of This Week in College Viability. Today's podcast episode focuses on an uncommon higher education topic, bonds, B-O-N-D-S, that's right, bonds. Hey, it's Gary Stocker and today I am with Ann Rutledge. Ann is the co-founding principal, CEO and strategist for Clean Fine Tech based out of

Gary (00:29.662)
a free market credit rating agency and welcome. Thanks for making time to join me today.

ann (00:35.262)
Thank you, Gary. Thanks for the great introduction.

Gary (00:39.19)
And if you would just for our listeners, if you would go ahead and briefly describe what your companies focus on and how that plays out with higher education in the United States.

ann (00:50.302)
Thank you, I would love to do that. So the company based in Spain is a FinTech, and the company based in the US is a rating agency. FinTechs do all kinds of things, but our focus in Bilbao, Spain is an extension of what we do in the US. Let me just give two minutes that have very little to do with higher education, but may have a lot to do with where the economy is today.

Gary (01:19.488)
Excellent.

ann (01:19.694)
We discovered 22 to 25 years ago, a big problem in how another kind of market was being raided, another type of bond, namely the bonds that were made out of mortgages. As we all know, there was a meltdown as a result of something. And we actually went live with a patented process that would have prevented that problem. And we supported a lot of investors who lost money

believing in ratings that turned out not to be sustainable. We believe in sustainability and we believe fundamentally as a rating agency and as a fintech that credit is a promise. The fact that we think that credit is a promise is really sort of a bridge to our conversation, Gary, today because we think that in times of change, like right now, the analysis of capital quality

which is really what bonds are about, capital, not necessarily promises, needs to go back to basics and understand exactly how value is being created, how it's being sustained and monitored, and how that value translates into capital quality for investment. So the conversation that we have today, I think, is really...

because I raised a question saying, yeah, okay, we're seeing that there are some developments from the ratings world. S&P put out a few statements regarding the changes in the not-for-profit higher education world, but gosh, do we really need to understand what's happening with the bonds or do we need to get more fundamental?

Gary (03:09.058)
So we are going to be turning the proverbial podcast tables today. Anne has followed our work at College of Viability. And instead of me asking questions today, she is going to ask. She's going to ask me questions. So, Anne, now be nice to me. But why did you want to be the one asking questions today?

ann (03:27.026)
Hehehe

ann (03:33.742)
Right. So, you know, we're a rating agency. We can't be too nice. But, but as an aside, we are really big believers in what you're doing, Gary, because what you're looking at is you're looking at the on the ground situation for higher education for colleges. I think an important takeaway from a recent podcast of yours that I listened to was that many colleges do not have the funds to operate as colleges.

In the credit world, we call funds to operate working capital. And we know that the December S&P report shows that only 7% of sub-investment colleges that they rated are sub-investment grade. Triple Bs are 29%, single A's are 37%, double A's are 27%. So sub-investment grade means that they are risky investments.

B, means they are investment grade, low investment grade. If this is true, then the vast majority of colleges that they rate are still investment grade. So, to me, this sounds a bit strange. And I'll just go on for one more minute. Granted, there are many more negative outlooks on colleges than positive outlooks. That's another part of their report. And this trend increased last year. And there's a downgrade ratio of two to one.

A college is twice as likely to be downgraded as upgraded. So these are indicators of a trend. But, and it undoubtedly will affect some colleges more than others, but Gary, you've been saying this a long time.

Gary (05:18.203)
Amen. Amen, Ann.

ann (05:20.542)
How is this news? And more importantly, to what extent, not to put you on the spot, but to what extent do you think the S&P ratings may reflect or perhaps understate the financial picture that you are seeing and talking about today?

Gary (05:36.282)
I think it's an easy answer. I think it grossly understates the challenges that the higher education market faces today. And in most of our conversation today, I think the assumption is going to be private colleges. And that's where I would qualify that as, because this isn't a bond issue in most college cases. Very few colleges, Ann, and correct me if I'm wrong, have the funds to actually pay for a reading service. And so what we have here is really a cash issue.

with colleges, we have a hand to mouth kind of issue taking place where the bond picture, when it's negative, when the bonds are something that a college can't pay off, may be the final indicator, the final breath of business life, if you will, for colleges that can't pay back those bonds. But the bonds themselves are so understated in their impact because colleges

don't have access to those actual ratings. And if they did, they wouldn't be good. And in my mind, the issue, while bonds are part of it, and like I said before, the final moment, it's really a supply and demand issue. And you've probably heard this over and over again, and I'll say it again, there are way, way too many college seats and not enough college students at whatever age willing to pay the tuition and fees associated with that.

And until that supply and demand gets somewhere closer to an economic equilibrium, we're going to continue to see closures for sure. And I'll just leave it at that right now. We might talk about cutbacks and layoffs a little bit later on. But the bond market understates the challenges that higher education faces mostly in the private sector.

ann (07:21.734)
That's a very interesting analysis. I mean, I think we're on the same page, Gary. I had said to you before we met right now that bond ratings are about the college as an investment, but you're not talking about the college as an investment. You're talking about the college as an experience, as a way for young people to acquire knowledge and skills and discover themselves and all the things that colleges are for.

So I think there is a bit of a disconnect between the meaning of the bond analysis and the fundamental meaning of a college and what are the drivers of the college level.

Gary (08:04.926)
Yeah, and you make a good point. Yes, in yours and my case, and in millions and millions and millions of other cases, that college experience was indeed about knowledge acquisition and skill development and self-discovery and all the other subjective and objective things that go with it. But the case that I like to make over and over again, that those students, for lack of understanding the big picture market, are not

are probably not getting the same kind of college experience you and I and millions of others had and continue to have because their college can't afford to keep up, just to make it to simplify. They can't.

keep up with the best microscopes and the newest software updates and the best hardware. And the faculty are probably underpaid. And just a quick sidebar story, iPads, which is of course the data source for college education, just dumped the last of their 2022 data yesterday. So, and when we get off the podcast, I'm jumping back on to doing the 2024 college viability app. Their data will suggest that, I'm almost certain this would be the case, graduation rates.

are catastrophic. And I'm trying to remember the numbers. It was something like 800 plus, out of 1100 plus, private colleges in the United States have four-year graduation rates under 50%. And I track six years, and the threshold I used for six years is a minimum of 70%, but the pattern holds. So think about that for a second. When you and I and our generations

College was a four-year deal and done. And now not only is it a minority of students that get done in four years, think about the scenario where you've been going to college for six years, you still don't have that bachelor's degree. It's not just the cost or that's substantial. Look at the two or three years of lost income, lost family, lost personal income you have because you didn't get through college. That's a tragedy.

ann (10:14.087)
Yes.

ann (10:18.342)
This is a tragedy, as you describe it, at the level of a family making the decision to send their kid to college or not, and to which college. To what extent do you think what we're getting from the rating agencies is useful?

Gary (10:35.778)
to a large extent. And let me plug back in to what you do. And I'll get there in a second. But of course, the college viability app that I just referenced is a comparison tool. And we compare eight years of data from IPEDS, which is from the National Center for Education Statistics the federal agency. And it's the comparisons that matter, the trends that matter. So I can look at enrollment trend for a college. I won't pick on anybody in particular today. I do that most days.

I can look at the trend and say, guys, I would not send my child there. I would not go there. But even the comparison tool, while valid, I still believe that there's opportunity to provide a service to this market that is a single number. And Forbes tries to do that with their financial grades, but that's that best of once a year kind of thing.

and then to market that to families to say, hey, this college is eight points on a 10 point scale, this college is two points on a 10 point scale, whatever it is, you make your own decision on whether this college is one for you or not. Because right now it's almost certainly Anne, like you and I did back in the day, it's the campus, it's the professors, it's the amenities, it's the sports, it's the tuition, it's the majors. And still with all the work I've done, the recognition,

of college as a risky financial investment for those who can't keep the lights on easily is something the market just does not yet recognize until we hit some tipping point somewhere where all of a sudden the market will say, hey, privates are too big of a risk. I'm out of here.

ann (12:16.378)
You know, it's a paradox. I'm listening to you describe what you know how to do. And when I put my rating agency hat on, not my rating agency hat from today, but from before, when I worked for Moody's Investor Service, and I didn't rate colleges, mind you. But I would say what you do is too complicated. It's

Gary (12:37.324)
Ha ha ha.

ann (12:44.678)
not capable of standardization and I don't know how to relate it to the financial statements that I look at. You would, but yet you manage.

Gary (12:51.826)
Oh I can agree with that heartbeat. Yeah.

Gary (12:58.21)
And I think what's happening on my end, and I'm not positive this is the case, is with the data that I do, the College Viability app and all the podcasts and videos, the college viability business for now is more of a content business. I am standing up on the proverbial stage saying, hey, be careful, and many, many more words than that. And I use the app and all that I can do with it to show others.

to be careful to choose colleges that just can't make it. But yet, to my knowledge, Ann, there's nobody doing anything like that. And here's a scenario that I shared with others, and I'll share it with you, and then I'll shut up for a second, is in vision a couple months ahead, it's April. And we know that May 1st is typically the college decision date for families across the country. And those many millions or hundreds of thousands of families are sitting at the kitchen table.

trying to make that final decision where their child is gonna go to college or where they're gonna go to college if they're an adult. And they don't have the knowledge, they don't have the perspective that you and I have that some colleges are really, really risky. And they choose one of those and months or a couple of years down the road that college says no mass, they close.

They cut back on majors and programs. They lay off faculty. And this child, this family chose that college because they just didn't know the risks.

ann (14:31.034)
Yes. And it's sad. And I mean, there are not to confuse the past with the future, because what you're describing is something that's going to happen in scale. But I still remember when Hampshire College was an experimental college that, you know, that people went to and got degrees in and it disappeared.

Gary (14:34.222)
That's sad.

ann (14:55.534)
So there is also the possibility of graduating, and then the college disappears. And with that, the alumni network, the marketing, the power of the university or the power of the college goes away.

Gary (15:05.622)
Yep. Yep, absolutely.

ann (15:07.646)
So, I mean, you go there first for learning and then for brand, but the brand part is very important as well.

Gary (15:14.874)
Yeah. And there's, you know, talking about college closures a little bit. There's an excellent book out there written by Jonathan Nichols, who went through the closure process at St. Joseph's College in Rensselaer, Indiana in 2017, I think it was. And the book is called Requiem for a College. And John Nichols taught some English writing, I think courses there. And his book chronicles the events leading up to the closure announcement.

ann (15:28.926)
Mm-hmm.

Gary (15:42.934)
the trauma associated with the actual announcement and the trauma after that. That's just the first part. Then this gentleman goes and does a detailed analysis of what the leadership at St. Joseph's College in North Central Indiana did and did not do leading up to their closure. And this is just prototypical of what's happening month after month in the United States.

It's different details, but the same scenarios. You can see it coming. I see it coming. You can see it coming. But those on the retail end, those families, those students, and even faculty and staff in large part, they may have concerns, but they don't realize the depth of the concerns they should have.

ann (16:30.214)
You know, I hear you. And there is something that I want to say in direct response to what you just said. But before that, I would like for us to exchange ideas around the idea that the quote from the prior podcast that I heard, the Gardner quote that said that

perception and location are the drivers of financial solvency of institutions of higher education. And clearly, to the extent that an institution of higher education is rated, maybe the private colleges that are in trouble are not rated, maybe they are rated, but to the extent that the industry is rated, could the trigger of the

Gary (17:01.142)
Yeah. Yep.

ann (17:23.294)
massive consolidation that you have been talking about for a long time, could that be more downgrades, wholesale downgrades, downgrades by the licensed rating agencies like S&P?

Gary (17:36.95)
I guess the... Well, I mean, there's two questions there. It would be... Let me come to the answer the first one. Let's go to the good and bad. I might ask for a follow up on that. But if all of a sudden the ratings agencies took a big shot at the colleges that are rated, that's sort of gonna have a negative impact.

ann (17:37.35)
And would that be a good thing or a bad thing?

Gary (17:55.826)
on colleges and probably because of the media plays, because regional reporting source after regional reporting source talks about colleges, their local colleges and they say, hey, it's a trend across the country. And if all of a sudden bond ratings are going down to the floor, then yes, that's going to be a big deal. But the quote from Gardner, perception and location, yeah. And location, these colleges have been born with, they chose their location decades, if not centuries ago, but perception,

And I mentioned that a minute ago, I think, Ann. If the perception develops that private colleges, especially small, non-urban private colleges, are a risk, you and I both know the market makes decisions on the fringes. And if parents and family start saying, it's just not worth going to small college Missouri or small college Illinois or small college California,

let's go public or let's go large private.

how quickly then does that cascade? And I don't know if I worry, but I wonder if as you and I sit here in mid January 2024, if that's not already happening. I have anecdotal evidence to support that. There will not be any concrete evidence anytime soon that that's the case. But you and I know markets are just...

ann (19:00.818)
Yes.

Gary (19:18.986)
What if we are in the leading edge of a market adjustment now, where the market, irrespective of college marketing and the things you mentioned a few minutes ago, the market decides it's not worth the risk. That's, if we want to have a good podcast someday, I'll bring in folks and we'll talk about what happens if that scenario is true. How do we as a nation, how do we as an industry dispose of lots and lots, I won't even attach a number to it, lots and lots of colleges that can't survive because the market adjusted.

ann (19:50.49)
You know, and I wonder if you're not correct in saying that it's happening now, because I recall not too long ago filling out a questionnaire on this very point about how, if there were sort of massive destruction of the colleges as an institution of higher education, what would happen and what are the choices? But I guess what I'd love to hear that podcast. I would really love to be a fly on the wall on that podcast.

Gary (20:20.)
Ha ha.

ann (20:20.014)
But something that I want to say from the other end, from the rating agency end, is, you know, these are institutions that the two largest ones, Moody's and S&P, they, S&P makes more revenues than Moody's does, but Moody's makes about 2.2 billion in annual revenues. These are not only very influential companies, but they make a lot of money. And the destruction of capital is really what you're talking about.

particularly in private colleges, because if there are colleges that are not doing the right thing, well, of course, they're going to, you know, gravity will take its course. But if there are colleges that are doing the very best that they can and they're pivoting in very, very good, forward-looking ways, and yet the word isn't getting out, then that's a tragedy. And that is...

in my world, so I used to work for a large rating agency, but today what the way that I look at credit is it's first of all a promise. And if you are making a loan to a large institution, then it's a promise to repay out of the total resources of that institution, you know, on time and in full. But there are other ways of making good on your promise. There are other...

types of investors who would like to see colleges survive, or that would like to have particular kinds of improvements on a more local and focused basis. These can be structured as bonds too. These can be rated as well. The meaning of a rating isn't just confined to assessing the capital of

know, of a larger university or a college that's powerful enough and has a big enough war chest to get raided. There's no reason to draw the line at what is already financially sustainable. This kind of analysis really flows through to the institution because the viability of the institution ultimately is seen in the capital structure, but it starts, it doesn't start with

ann (22:42.162)
parents and self-funded students who are paying the tuition, doesn't it?

Gary (22:47.574)
Well, absolutely. And the way you categorize the issues with higher education as the destruction of capital is something, Ann, that I would never think about. That's just not the way I look at it, but it makes sense. And I think you mentioned somewhere in there the right thing. And many times when I do these podcasts, whether I'm doing the interviews or somebody's interviewing me, they say, well, Gary, how do I fix this? And the fix is something that has happened, I think, Ann, in every other industry. And that has been consolidation to scale.

And I have made this case for many years now that higher education is maybe the only industry that has not addressed the concept of doing their business to scale and engaging in substantial consolidation through mergers or consolidations. And I use those synonymous synonymously. I leave the acquisition part out that just isn't realistic in higher education. And there's cultural components, I understand. There are some legal components and regulatory components.

ann (23:35.018)
Mm-hmm.

Gary (23:47.286)
But if there's a fix to this, it is the mom and pop colleges, those with enrollment a thousand or less, give or take, joining into a larger organization to scale both academic and non-academic operations. And there is no, almost no indication that is anywhere close to happening.

ann (24:08.71)
Gary, that is absolutely fascinating and you've answered so many of my questions. I would just throw a question out there which is, is this not happening perhaps because the tools haven't been developed for it? Because the economics that drives the development of those tools hasn't been there?

Gary (24:28.346)
And you've got to quit reading my mind. Yeah, again, that's an easy answer to that, certainly. And as I ponder this here on a cold St. Louis morning in mid-January, maybe the College Viability app is part of the evolutionary process that gets us to a point where it's no longer the subjective, mostly subjective components of US News and World Report.

and Princeton and other rating agencies, it's something that is more objective. That is a comparison tool. And I, till death do I part, I will never say that the Gary Stocker College is gonna close. I'm just not gonna do it. I will compare a Gary Stocker College to Ann Routledge University and say, look how well Routledge University is doing with their enrollment and graduation rates and look how poorly Stocker University is doing with bad enrollment and bad graduation rates.

But there needs to be an evolution of the system that makes it more objective. And I know that's a big part of what you ponder.

ann (25:30.738)
Well, I can't ponder the evolution of the system without quality being created at the level where it needs most to be created. And I think the challenge is a translation challenge, basically, to translate what you're doing into the big words of capital, because you're actually solving a very big problem, whereas the people looking at the capital are maybe solving a very little problem, and in some cases not solving any problem at all.

Gary (25:59.855)
point. A good point. That's a great point. Yeah.

ann (26:01.914)
Yeah, but to join the two things together. And I think this is a great conversation as a kind of first start, perhaps.

Gary (26:10.154)
Well, excellent. Well, Anne, you were nice to me. I'm grateful. So thanks for your questions. They were, as always, very informed questions. And from my perception, they're adding value to this discussion. And I think our listeners will see that as well. So there you have it. While graduation rates and tuition revenue endowments and more are an important future and financial indicators of a college's, mostly private college's financial future.

a really hidden component to almost everyone in higher education is the bond market. My guest today has been Ann Rutledge, co-founder and principal and CEO for Clean Fintech in Val Valle, Spain and in the US is CreditSpectrum. And let's make sure we talk again in a few months to see what else we can talk about.

ann (26:56.978)
That sounds fantastic, Gary. Thank you so much.

Gary (26:59.574)
My pleasure. We'll talk soon. Take care.

ann (27:01.551)
Bye.