Overview

• We believe UoM's global reputation will continue to attract strong student demand, and the university will maintain a high level of financial resources and low annual debt service, underpinning our rating during this period of uncertainty.
• We expect UOM will continue to demonstrate its fiscal flexibility during the next one to two years as its financial performance is pressured because of the COVID-19 pandemic, particularly Australia's tough travel restrictions.
• We are affirming our 'AA+/A-1+' long- term ratings on UoM. The outlook is stable.

Rating Action

On June 25, 2021, S&P Global Ratings affirmed its 'AA+/A-1+' long-term foreign and local currency issuer credit ratings on University of Melbourne (UoM). The outlook is stable.

Outlook

The stable outlook reflects our expectation that UoM will maintain its exceptionally strong enterprise and financial profiles. This is despite some financial metrics weakening because of COVID-19 and the inclusion of a large finance lease. We expect UoM's role and link to the Australian government to remain unchanged.

Downside scenario

Downward pressure on the ratings could eventuate if UOM's enterprise or financial profiles were to weaken significantly. This could occur if travel restrictions were to persist longer into 2022 and we saw a significant loss of income without subsequent cost savings, resulting in structurally weaker financial performance and available resources, and a substantial rise in debt levels.

Upside scenario

We could raise our ratings on UoM if its financial profile were to strengthen, with more diverse revenue streams supporting high operating margins, if its available resources were to rise sharply, or its annual debt services were to decline substantially. These factors could support UoM's credit profile at a higher rating level during periods of stress.

Rationale

UoM's global reputation will continue to attract strong student demand, and the university will maintain a high level of financial resources and low annual debt service, during this period of uncertainty.

Like all Australian universities, tough international travel restrictions and campus closures associated with the COVID-19 pandemic continues to crimp UoM's enrolments of international students leading to weaker revenues. UoM's proactive approach to strengthening its financial position via large saving measures and increasing liquidity lines, coupled with a Commonwealth government support package, buffered some of this revenue. We expect UoM to continue displaying fiscal flexibility with pay cuts or freezes, potential reductions in staff headcount, and deferrals of capital investment and discretionary spending to support its financial position.

We consider the pandemic to represent a near-term risk to UoM and other universities that we rate.

The ratings also reflect our opinion of a moderately high likelihood that the Australian government would provide extraordinary support in the event of financial distress.

UoM is the highest-ranking university in Australia

We expect student numbers to shrink by about 10% next year before recovering. This is driven by COVID-19-related travel restrictions by the Australian government affecting international students imposed. Based on application rates, demand from new students remains robust. This should continue when travel restrictions ease, given UoM's high global ranking. Total full-time equivalent student numbers now exceed 52,000 as of Dec. 31, 2020 and international students represent 50% of the university's student base.

UoM is Australia's second oldest university and has developed a strong market position because of its reputation for quality teaching and research. It holds the top rank among Australia's elite research-focused "Group of Eight" universities, based on an average of international ranking scales. Its strong market position is also reflected on an international scale, being ranked 31 in the Times Higher Education list and 35th globally in the Shanghai Ranking Consultancy's ARWU ranking. This supports ongoing demand from high-quality domestic and international students.

The university's median entry score of about 93.7 from a possible 99.95 is one of the highest in the country and well above the national average. The university's "Advancing Melbourne" program after implementation of "Melbourne Model" continues to support demand and remain globally competitive. This enables strong undergraduate demand and a high proportion of undergraduates transitioning to postgraduate studies upon completion. Around 51% of UoM students were postgraduates in 2020. Additionally, UoM retains about 95% of its first-year students annually.

UoM continues to attract high-caliber vice-chancellors, deputy vice-chancellors, and vice presidents who execute consistent strategies, and identify and address financial and operational risks.

The university showed its financial acumen during the COVID-19 pandemic by deferring nonessential and many infrastructure projects that weren't underway. UoM has a long-term strategic plan focusing on infrastructure development to house the increased student demand it was expecting prior to the pandemic. It has designed an "estate plan" in alignment with Advancing Melbourne as a guideline for campus development frameworks, the blueprints that monitor the planning, design, and development of the university's campuses. Among the major projects UoM expects to complete within the next few years is a new student precinct by 2022.

S&P Global Ratings considers the global higher-education sector to be low industry risk and Australia to be a very low country risk. Australia's wealthy economy--GDP per capita of US$60,300 in 2021, reflecting an Australian dollar lower than the previous year--supports the higher education sector's economic fundamentals.

Large financial resources and fiscal flexibility will provide a buffer against revenue hits

We expect UoM's financial profile to remain strong as it responds to COVID-19 pandemic. It is underscored by ample levels of unrestricted financial resources and robust financial policies. It is supported by available financial resources of approximately A$1.165 billion, covering about 46% of operating expenses in 2020, as well as a relatively modest annual debt service.

UoM's investment portfolio has rebounded strongly since the onset of the pandemic. Financial resources have regained their value by the end of 2020. Our definition of financial resources does not include UoM's endowment fund of A$1 billion because we consider these assets restricted and not available to repay debt. Some 4% to 5% of the endowment can be accessed each year and must be used in line with trust deeds. UoM's financial resources include funds raised through borrowing that are not yet spent because we consider them unrestricted and available to cover expenses and debt service if required.

UoM's average operating margins will narrow but should remain in surplus. As the COVID-19-related restriction continues, we assume a shortfall in student revenues of about 10%-12% of the total income over the next two years. This is because international students are an important source of funding for UoM, reducing the university's reliance on government grants in recent years. Meanwhile, it will continue to have some additional costs related to development of virtual learning platforms and hardship support for students, thereby lowering our operating margins expectations for 2022.

The negative effect of the pandemic has been minimized by savings measures and the introduction of a one-off government support package of A$111 million in 2021 to support research and research capability, resulting in an operating surplus. We expect UoM to tightly manage its costs, including pay cuts or freezes, potential reductions in staff headcount, and deferrals of capital investment and discretionary spending to help minimize the financial impact. UoM achieved about A$360 million in operating savings in 2020 and is targeting a further A$250 million over the next two years.

UoM's adjusted operating margins were around 7.6% in 2020, down from 8.9% in 2019. These margins are high compared with most of its domestic peers.

Government-funded tuition fees are capped in Australia, and these students make up about half of UoM's student body. We believe government reforms are unlikely to have a significant effect on the university's financial profile. The Job-ready Graduates Package, which became law in late 2020, promises to raise the federal government's sectorwide funding to A$20 billion in 2024 from A$18 billion in 2020, creating up to 30,000 new places for domestic students.

We expect debt levels to increase substantially in 2021. The Melbourne Connect project will be finalized and capitalized on the university's balance sheet in 2021. UoM has entered into a 42-year finance lease, and the net present value of the finance lease could fluctuate, depending on the discount rate used.

The university raised A$150 million in January 2021 to prefund part of an upcoming maturity of A$250 million in July 2021. We do not expect this to have any major effect on its debt burden. The total debt decreased to A$684 million in 2020 from A$711 million in 2019.

We consider UoM's finance and debt policies to be sound. The Victorian state treasurer and education minister approve borrowing limits. UoM must satisfy the state government about the use and sustainability of debt before receiving approval. All long-term debt is used for capital projects and not operating expenses, while derivatives are only used to hedge interest and foreign-exchange risk, and not for speculative purposes.

S&P Global Ratings considers UoM's reserve, liquidity, and investment policies to be well defined and monitored, with centralized cash and debt management ensuring adherence to these policies. The Victorian state government's Victorian Funds Management Corp. manages UoM's large investment holdings. Two- to three-year forecasts and capital plans identify potential issues, similar to its domestic peers. UoM's investment portfolio lost some value during the market downturn due to COVID-19 but showed some improvement in 2020 as the economy started to recover. UoM only publishes audited results annually on a consolidated, accrual basis with accompanying cash-flow statement.

Limiting UoM's exposure to contingent liabilities are the nature of its student accommodation agreements, which significantly limits potential recourse to the university and fully transfers student occupancy risk to the counterparty, and an agreement between the Commonwealth and Victorian governments to cover its unfunded superannuation retirement benefits. The agreement is outlined in the States Grants (General Revenue) Amendment Act 1987.

Moderately high likelihood of extraordinary government support

We consider there to be a moderately high likelihood of extraordinary support from the government. This is based on our view of UoM's important role for the Australian government in fulfilling public policy.

UoM plays an important role in fulfilling the government's public policy and tertiary education objectives. As an independent, not-for-profit entity, it educates students and helps to develop Australia's human capital. We do not believe that recent government funding reforms have led to a weakening in this role.

We consider UoM to have a strong link to the Australian government. This is demonstrated by the government's track record of funding and oversight of the higher education sector. The government remains the largest source of income for the higher-education sector. UoM reports on its spending of Australian government funding to the Commonwealth Department of Education, which is responsible for developing higher-education policy and programs.

Further, the sector is regulated by the Tertiary Education Quality and Standards Agency, which sets standards that registered higher-education providers must meet to maintain their registration. UoM has a clear corporate structure, with independent management that makes autonomous business decisions.

Environmental, social, and governance factors

In our view, higher-education entities face elevated social risk due to uncertainty over the duration of the COVID-19 pandemic. The prolonged period of international border closures is casting doubt over 2022 enrollment numbers. We view the risks posed by COVID-19 to public health and safety as a social risk under our ESG factors. Despite the elevated social risk, we believe UoM's environment and governance risk are in line with our view of the sector. Moreover, UoM took various measures in 2020 toward its environmental sustainability initiative to achieve zero net emissions electricity by 2021 and commitment to carbon neutrality before 2030.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Table 1

Related Criteria

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
• General Criteria: Methodology: Not-For-Profit Public And Private Colleges And Universities, Jan. 6, 2016
• General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• Australia Outlook Revised To Stable On Swift Economic Recovery; 'AAA/A-1+' Ratings Affirmed, June 7, 2021
• Australian Universities Go From Boom To Zoom, April 27, 2021
• Australian University Finances Under COVID-19: Degrees Of Discomfort, April 27, 2021
• Outlook For Global Not-For-Profit Higher Education: Empty Chairs At Empty Tables, Jan. 20, 2021
• Australia, Canada, Mexico, And U.K. University Medians Report: Pandemic-Related Pressures Could Upset Recent Credit Metric Stability, Oct. 20, 2020

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