University Of New South Wales #AA+/A-1+# Ratings Outlook Stable

Stocks and Financial Services Press Releases Monday November 13, 2017 17:36
MELBOURNE--13 Nov--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Nov. 13, 2017--S&P Global Ratings today affirmed its 'AA+' long-term foreign and local currency and 'A-1+' short-term issuer credit ratings to the University of New South Wales (UNSW). The outlook on the rating is stable.

The ratings reflect our view of UNSW's stand-alone credit profile (SACP: 'aa+'), as well as our opinion of a high likelihood of extraordinary support for UNSW from the Australian government in a distress scenario. UNSW's SACP is based on our view of its very strong enterprise profile and very strong financial profile.

UNSW, established in 1949, has developed a strong market position, with a good reputation for teaching and research. It is highly ranked globally with a Times Higher Education (THES) ranking of 85 in 2018, Shanghai Jiao Tong ARWU ranking of 101-150 in 20176, and QS university ranking of 49 in 2017. The university has improved its THES ranking substantially since 2014 and is focused on improving further with its 2025 strategy, which aims to make it Australia's "global university," focused on research and teaching.

UNSW has three strategic priorities: academic excellence, social engagement, and global impact. The strategy will increase investments in research and teaching professionals, scholarships, and infrastructure investment. UNSW expects the strategy to be self-funding over the long term.

This should maintain ongoing demand from high-quality domestic and international students. Its median entry score of about 91 out of a possible 99.95 in 2016 is one of the highest in Australia and is well above the national average. Postgraduate students account for about 27% of total students, while international students represent about a third of students, which supports its revenue growth but also exposes it to the performance of foreign markets.

UNSW attracts strong demand from new students each year and it retains more than 90% of first-year students annually. This strong retention is contributing to rising enrolment figures, with full-time equivalent student numbers of more than 42,000 in 2016, up 4% from a year earlier. Most growth is occurring in higher fee-paying international students rather than domestic students. UNSW is considering moving to a trimester teaching period to improve the efficiency and usage of its main campus throughout the year. It is also exploring online delivery methods as a way to access students who are unable to attend classes on campus.

We believe the university attracts high-caliber employees who competently execute strategies, and identify and address financial and operational risks. We expect UNSW to broadly deliver on its 2025 strategy as it outlines key milestones to monitor its progress. S&P Global Ratings considers the global higher education sector to be low industry risk, and Australia to be a very low country risk. Further, Australia's very wealthy economy (GDP per capita of US$50,000 in 2016) supports the higher education sector's economic fundamentals.

UNSW's very strong financial profile reflects its low debt levels, with a low annual debt service of less than 0.5% of operating expenditure. In addition, its financial policies and position ensure the university generates operating margins of more than 5% of operating revenues (adjusted for capital grants and nonrecurring items). In 2016, it achieved operating margins of more than 8%, underpinned by international student numbers increasing by 11% and their fees rising more than 25% compared with 2015. UNSW's international student numbers grew by about 25% in 2017, with associated fees likely to rise substantially again, which could drive margins higher. While the strong increase in international students diversifies the university's student base, it also makes UNSW more vulnerable to the performance of foreign markets, particularly China.

UNSW's borrowings are rising from just A$38 million as of Dec. 31, 2016, but remain relatively low compared with peers, as does its annual debt service. UNSW traditionally cash funds the majority of its capital works; hence, it hasn't needed to borrow in the past. UNSW is well placed to manage higher borrowing levels at the current rating level, with unrestricted financial resources (A$613 million as of Dec. 31, 2016) to debt of more than 1,000% between 2014 and 2016. Financial resources covered about 30% of annual operating expenses during the same period. These resources exclude the university's endowment and beneficial funds of about A$235 million as of Dec. 31, 2016, because these assets are generally restricted and not available to repay debt and its holdings of illiquid assets.

We consider UNSW to have limited financial flexibility, like its domestic peers. In Australia, government-funded tuition fees are capped, and these students make up about two-thirds of the student body. Further, the sector is facing cuts of about 2.5% of Commonwealth grants in 2018 and 2019 after the 2017-2018 Commonwealth budget, while the government is seeking to reduce its contributions for Commonwealth-supported places. This could result in student fees rising 7.5% by 2021 and the repayment threshold being lowered. We believe this should have no direct impact on universities' finances because students will be required to fund the gap. Australian universities already have faced cuts to research grant by the Commonwealth, such as a A$300 million cut in block grants (the sustainable research excellence program), which helps meet the indirect costs of university research. In 2016, UNSW received one of the highest amounts of Australian Research Council grants in Australia. Further constraining its expenditure flexibility is the proportion of employee expenses, which is currently about 50% of total operating expenses.

In accordance with our criteria for government-related entities (GREs), our view of a high likelihood of support is based on our view of UNSW's:
  • Very important role for the Australian government in fulfilling public policy, given that it operates essentially as an independent not-for-profit entity and meets key economic and social objectives of the government; and
  • Strong link with the Australian government, demonstrated by its track record of significant credit support and oversight arrangements. Meanwhile, UNSW has a clear corporate structure with independent management that makes autonomous business decisions.
The stable outlook reflects our expectation that UNSW's successful execution of its 2025 strategy will support its enterprise profile, while it maintains its market position.

Downward pressure could occur if UNSW's management is unsuccessful in executing its 2025 strategy, resulting in a weakening of its market position and student demand, and/or significant worsening of its financial profile. We consider this scenario unlikely in the next two years.

Upward pressure on the rating could occur if UNSW's cash and investments are very high compared with its debt levels during a prolonged period and while the rating on the Australian government remains at 'AAA'.

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