University of Wollongong #AA# Long-Term Foreign And Local Currency Ratings Outlook Stable

Stocks and Financial Services Press Releases Thursday July 27, 2017 16:23
MELBOURNE--27 Jul--S&P Global Ratings
MELBOURNE (S&P Global Ratings) July 27, 2017--S&P Global Ratings today said it has affirmed its 'AA' long-term foreign and local currency issuer credit ratings on the University of Wollongong (UOW).

The outlook remains stable. The 'AA' ratings on the University of Wollongong (UOW) reflect our view of its stand-alone credit profile (SACP), which we assess at 'aa'. They also reflect our opinion that there is a moderately high likelihood that the Australian government would provide extraordinary support to UOW in a distress scenario. The SACP is based on our view of the university's very strong enterprise and financial profiles. UOW is one of Australia's larger regional public universities and has a good academic reputation. Its main campus is in Wollongong, about 80km south of Sydney. It also operates a large campus in Dubai, with about 3,610 students, and a number of smaller satellite campuses across regional New South Wales (NSW). UOW is developing two new locations in South Western Sydney and Hong Kong.

The South Western Sydney Campus at Liverpool opened in April 2017, and is due to expand into larger premises in 2019. In 2015, UOW assumed stewardship and governance of the Community College of City University (CCCU) in Hong Kong.

These arrangements are expected to see CCCU evolve into an internationally-accredited, degree-offering institution over a five-year transition period. CCCU currently provides associate degree- and diploma-level education to over 6,000 students.

We view UOW's international exposure as indicative of a higher risk appetite compared with domestic peers. UOW has a high student retention rate (86% for undergraduates in 2016) and stable selectivity (around 56% over the past three years) as measured by the number of new commencing students as a proportion of applicants.

Its undergraduate students had a mean tertiary entrance score of about 72 out of a possible 99.95 in 2016. UOW's international reputation is robust, particularly among younger universities, as evidenced by high standings in the QS Top 50 Under 50 (17th in 2018) and the Times Higher Education Young University Rankings (30th in 2017). In the overall Times Higher Education World University Rankings, UOW places in the 251st to 300th bracket. S&P Global Ratings views the global higher education sector as a low industry risk, and Australia as having low country risk.

Australia's very wealthy economy (with a GDP per capita of around US$50,000 in 2016) supports the local sector's economic fundamentals. UOW's very strong financial profile reflects its sound financial policies and high level of available resources, which stand at A$466.2 million as of Dec. 31, 2016.

Our analysis of available resources excludes the university's endowment fund and trust arrangements relating to CCCU Ltd., because these assets are generally restricted and not available to repay debt. UOW has high levels of cash and investments, standing at around A$612.2 million.

We expect cash levels to decline over the next two years as the university rolls out a large capital expenditure program; with the university's plan indicating that UOW will commit A$300 million to new infrastructure over the period 2016-2020. UOW's financial performance has been strong, with operating margins of around 6.2% of operating revenues (on our adjusted weighted-average basis) over 2014-2016.

These margins support our view of UOW's creditworthiness. Contrary to our previous expectations, the university did not increase its borrowings in 2016. Its outstanding debt consists of two indexed annuity bonds. The first bond of A$42.5 million was issued in August 2008 for a term of 30 years.

The second bond of A$20 million was issued in December 2010 for a term of 25 years. Both bonds are instruments where the applicable periodic interest rate is indexed to the consumer price index (CPI). UOW's current annual debt service, as a proportion of its adjusted operating expenses, stands at a very low 0.7%. We believe the university has sufficient financial resources to cover upcoming debt repayments, or operating deficits if they were to eventuate, if it is unable to access debt markets. In 2014, UOW entered into an A$250 million public-private partnership (PPP) arrangement with a private investor consortium covering its entire student accommodation portfolio.

In exchange for an upfront payment, the private investors receive rental income streams from UOW's nine existing residences plus one recently completed residence (Bangalay) and one under construction (Kooloobong Village expansion). UOW retains ultimate ownership of the residences, and the private investors have no recourse to the university. As such, S&P Global Ratings treats this arrangement as a contingent liability rather than as debt.

The university is exposed to a small financial downside if occupancy numbers fall below a pre-agreed threshold. Legislated caps on domestic student tuition fees limit UOW's revenue flexibility, and expenditure flexibility is constrained by the high proportion of employee expenses in its cost base. Like its Australian university peers, UOW's financial performance may be challenged by proposed cuts to the Commonwealth Grant Scheme, which subsidizes the costs of teaching domestic students, over 2018 and 2019.

In accordance with our criteria for government-related entities (GREs), our view of a moderately high likelihood of support is based on our view of UOW's: Important role for the Australian government, as it operates as an independent not-for-profit entity providing an important public service; andStrong link with the Australian government, demonstrated by the latter's track record of significant credit support to the higher education sector and oversight arrangements.

Meanwhile, UOW has a clear corporate structure, with independent management that makes autonomous business decisions.

The stable outlook reflects our expectation that UOW's enterprise profile and financial profile will remain very strong as it executes on its strategies. The outlook also reflects our view that UOW's role and link to the Australian government will remain unchanged, even if its SACP moderately weakens.

Downward pressure on the rating could occur if UOW's enterprise or financial profiles significantly weaken. The financial profile could weaken if the Australian government significantly reduces its financial support to the higher education sector (and UOW is unable to respond with matching cost cuts), causing its operating margins to deteriorate, or if UOW's international campuses struggle.

It could also weaken if the university increases its borrowings by a substantial amount. Upward pressure on the rating could occur if UOW demonstrates increased revenue and expenditure flexibility. It could also occur if UOW experiences strong growth in key revenue streams, such as from fee-paying students, leading to sustained higher operating surpluses.

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