Overview

• UNSW's global reputation should continue to attract students, and the university is likely to maintain a high level of financial resources and low annual debt service.
• It is likely to continue demonstrating fiscal flexibility during the next one to two years while under pressure from Australia's tough travel restrictions.
• We are affirming our long-term issuer credit rating at AA+ and short-term rating at A-1+.
• The outlook is negative.

Rating Action

On July 27, 2021, S&P Global Ratings affirmed its 'AA+/A-1+' issuer credit ratings on the University of New South Wales. The outlook is negative.

Outlook

The negative outlook reflects an at least one-in-three chance that we could lower our ratings in the next two years. This could happen if UNSW's financial metrics were to deteriorate beyond our base case if it is unable to achieve adequate savings to mitigate the revenue loss caused by a decline in onshore international students.

Downside scenario

Downward pressure on the ratings could eventuate should the drop in enrollments and corresponding response from the university management materially weaken UNSW's financial profile. This could occur if operating margins were in persistent deficit, causing cash and financial assets to fall and/or debt levels to rise substantially.

We could also lower our ratings on UNSW if we perceived the likelihood of government support to be weakening.

Upside scenario

We could revise our outlook to stable if UNSW is able to manage the effects of COVID-19 without a material erosion in financial metrics, in such a way that enrollments gradually normalize.

Rationale

Like other Australian universities, tough international travel restrictions and campus closures associated with the COVID-19 pandemic continue to crimp UNSW's enrolments of international students, leading to weaker revenues. UNSW's proactive approach to strengthening its financial position via large saving measures and increasing liquidity lines has buffered some of this revenue loss. UNSW is likely to continue displaying fiscal flexibility and deferring capital investment and discretionary spending to support its financial position.

We consider the pandemic to represent the most pressing near-term risk to UNSW and other universities. (see "Outlook For Global Not-For-Profit Higher Education: Empty Chairs At Empty Tables," published Jan. 21, 2021).

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

UNSW's quality reputation with strong demand supports its enterprise profile

While UNSW's global appeal remains strong, we anticipate international student numbers will shrink in the short term, driven by COVID-19-related travel restrictions. Based on application rates, demand from new domestic students remains robust. This should continue when travel restrictions ease, given UNSW's high global ranking. We believe demand for UNSW will continue when travel restrictions ease, given UNSW's high global rankings. Total full-time equivalent student numbers exceeded 45,000 as of Dec. 31, 2020. However, frosty relations between Australia and China pose a downside risk.

UNSW, established in 1949, has a well-regarded reputation for quality teaching and research. This has allowed it to develop an excellent market position. It is highly ranked globally, with a Times Higher Education (THES) ranking of 67th in 2021 and QS University ranking of 43rd in 2021. We believe a well-executed 2025 strategy--to focus on becoming Australia's leading research and teaching university--could improve its ranking.

UNSW's strategy should ensure ongoing demand from high quality domestic and international students. UNSW is focused on student experience and commitment to educational excellence. Its median entry score of about 91.5 (of a possible 99.95) in 2020 is well above the national average and one of the highest in Australia. In 2020, postgraduate students accounted for about 24.3% of total students. International students represented 36.5% of total students. This exposure to international students has provided strong revenue growth in recent years. However, it also exposes UNSW to the performance of foreign markets, particularly China. Chinese students account for roughly two-thirds of all international students at UNSW and have been greatly affected by the current travel restrictions.

The 2020 decline in international student enrolments had less effect on UNSW than its domestic peers. This was because of UNSW's unique trimester model, which meant students were already in the country before the border closed. UNSW reactivated its campuses in 2021 in a measured and COVID-19 safe way, attracting domestic students; it was not plagued with rolling lockdowns like other areas within Australia. Notwithstanding the current New South Wales lockdown, the university has been able to pivot to online learning for the short term. The university has proposed a pilot program to return international students that could start in the second half of 2021. The proposal is awaiting Commonwealth approval after being approved by the state. We believe this will not have a material effect on international student numbers in the short term because the number is capped at 250 students a fortnight; however, it is the first concrete step toward bringing international students back since the onset of the pandemic.

The university showed its financial acumen during the COVID-19 pandemic by deferring nonessential and many infrastructure projects that weren't in hand. The university established Taskforce 2020-2021 working groups to update its organizational and divisional structure, resulting in employee savings. Under its long-term strategic "2025 Strategy," UNSW has delayed some short-term spending, such as for campus activities.

UNSW 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. 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.

Fiscal flexibility to provide a buffer against revenue hits

We expect UNSW's financial profile to remain strong as it responds to the COVID-19 pandemic. The university has ample levels of unrestricted financial resources and robust financial policies. We expect the university to maintain financial resources between 25% and 35% of operating expenses and 1x-2x its total debt, along with relatively modest annual debt service.

UNSW's cash levels have grown since the onset of the pandemic. The university drew down on its bank facilities to have cash on hand in the event of an unforeseen emergency. Our definition of financial resources doesn't include UNSW's endowment fund, Commonwealth Superannuation Scheme assets, and other special-purpose reserves because these assets are generally restricted and unavailable to repay debt. Its consolidated cash and investments increased to 3.28x total debt in 2020 from 3.01x in 2019.

We expect UNSW's average operating margins to narrow but remain in surplus in 2021. As the COVID-19-related restriction continues, we assume a shortfall in student revenues of about 10% to 11% of the total income over the next two years. This is because international students are an important source of funding for UNSW, 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.

UNSW's adjusted operating margins were around 3.1% in 2020 (excluding one-off redundancy costs), up from 0.65% in 2019. We expect the university to maintain an operating balance over the coming years. We note that these assumptions are subject to an unusually high degree of uncertainty at present and will hinge on the timing of any lifting of travel restrictions in Australia and abroad.

UNSW is responding to the COVID-19 shock by curtailing capital and discretionary expenditure, including pay cuts or freezes, reductions in staff headcount, and deferrals of capital investment and discretionary spending to help minimize the financial impact. Staff redundancies undertaken in 2020 locked in operating savings of A$75 million, mitigating some of its revenue losses from weaker international student revenue.

In late 2020, the Australian parliament passed the "Job-ready Graduates Package" of reforms. The reforms will, from 2021, alter the mix of tuition fees paid by domestic students and Commonwealth Grant Scheme subsidies contributed by the Australian government for different courses. This could place further strain on sectorwide operating margins (see "Australian University Finances Under COVID-19: Degrees Of Discomfort," published April 26, 2021). However, the revenue effect should be mitigated by a transition fund, and universities are likely to adjust their course offerings in response to the reforms.

Even when factoring in the current COVID-19 shock, UNSW's debt levels and service costs remain relatively low compared with its international peers. In 2021, the university raised A$200 million via a committed revolving facility, bringing its total undrawn amount as A$400 million. We estimate UNSW's maximum annual debt service will reduce to about 2.35% of operating expenses in 2020, from 3.12% last year. UNSW might also seek to refinance or repay its A$150 million bank line maturing in April 2022.

Australian Accounting Standards Board (AASB) 16, a new standard adopted in 2019, removed the distinction between operating leases and finance leases. We continue to exclude what were formerly classified as operating lease liabilities from our measures of UNSW's debt, in line with our criteria.

Limiting UNSW's exposure to contingent liabilities is an agreement between the Commonwealth and New South Wales 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 government support. This is based on our view of UNSW's important role for the Australian government in fulfilling public policy.

The Australian government has offered only modest relief for the higher-education sector since the onset of the pandemic. In 2020, it made a one-off A$1 billion top-up of the Research Support Program, which funds research grants across Australia's universities; however, did not include universities in other relief measures such as payroll tax relief. We have therefore lowered our assessment of government support to moderately high from high for the university by lowering our assessment of its very important role to important.

UNSW 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 UNSW 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. UNSW 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 Tertiary Education Quality and Standards Agency regulates the sector and sets standards that registered higher-education providers must meet to maintain their registration. The NSW Auditor-General audits its accounts and the report is tabled in the NSW parliament.

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 UNSW's environment and governance risk are in line with our view of the sector.

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, Canada, Mexico, And U.K. Universities Medians Report: Credit Metrics Remain Largely Stable Through Persistent Headwinds, June 30, 2021
• Australia Outlook Revised To Stable On Swift Economic Recovery; 'AAA/A-1+' Ratings Affirmed, June 7, 2021
• Australian University Finances Under COVID-19: Degrees Of Discomfort, April 26, 2021
• Australian Universities Go From Boom To Zoom, April 26, 2021
• Outlook For Global Not-For-Profit Higher Education: Empty Chairs At Empty Tables, Jan. 21,2021

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