(Bloomberg) -- Economic strains that have pushed a number of colleges and universities to the brink show no signs of stopping, with Holy Names University in Oakland, California, the first to default on its debt in 2023.

The Roman Catholic school with fewer than 1,000 students defaulted on a $49 million loan, according to a Jan. 3 filing, after the almost 155-year-old institution announced it would be closing its doors at the end of the academic year. 

The closure is likely a harbinger of what’s to come as S&P Global Ratings has warned less selective, regional institutions will struggle in the new year. Growing competition, falling enrollment trends and higher expenses could weaken credit quality. At the same time, waning risk appetite ahead of a looming recession means struggling schools’ access to the $4 trillion municipal-bond market could be limited.

“It boils down to a supply and demand issue,” said Lisa Washburn, managing director at Municipal Market Analytics. “We’ve just got too many seats for too few students. Add to that rising costs and a pandemic, and some schools just become uneconomical to run.”

With a projected decline in US high school graduates, it’s an issue more universities are facing. But the pain is especially apparent at small, religious colleges with high acceptance rates.

Georgian Court University, a Catholic school in New Jersey, was downgraded into junk by Moody’s Investors Service Thursday, citing declining enrollment and strained revenue. Presentation College, a Catholic institution in South Dakota, announced plans to close early last week. And Birmingham-Southern College, a liberal-arts school affiliated with the United Methodist Church, is asking for $37.5 million to keep its doors open. 

Rising costs, exacerbated by the pandemic, have contributed to Fitch Ratings’s “deteriorating” outlook on the higher education sector. In 2020, Holy Names reported operating losses of $8.6 million, followed by $4.2 million in 2021. However, the university was already struggling in 2019 when it tapped the municipal-bond market for $49 million to pay off old debt and fund capital expenditures. 

Tuition at Holy Names — a predominately-Hispanic and Black university, where roughly half of students qualify for Pell Grants — costs about $52,000 a year, including meals and housing.

A five-year plan initiated in 2019 intended to boost enrollment, but only 943 students were enrolled this past fall, missing projections by nearly 40%. Spring enrollment was even worse after the university said in November it was looking to merge with another school to cover expenses. Only 449 students enrolled.

Ultimately, Holy Names did not find a suitor — in what appeared to be a difficult search, according to a Dec. 14 letter by student body president Ruby Mayne to the board of trustees. The university missed multiple deadlines for an update to students, resulting in “rampant rumors” and “a scramble to meet transfer deadlines.”

Moreover, its failure to merge with another school highlights how vulnerable smaller colleges are in an oversaturated market, said Dora Lee, director of research at Belle Haven Investments. 

About $687 million of outstanding debt sold for US colleges and universities has defaulted or has payments at risk, according to data analyzed by Bloomberg.

“The fact that it wasn’t assumed by another higher-ed facility shows that while we do expect mergers and acquisitions, merging your way out of these problems might not be an option for a lot of these small colleges,” Lee said. “In this high-interest rate environment, the closure of Holy Names is a theme that we expect to continue.”

Neither Holy Names nor Preston Hollow Community Capital, the majority bondholder, responded to requests for comment.

--With assistance from Nic Querolo and Trevor Rowe.

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