Overview

• UNSW's financial profile is improving, supported by stronger operating surpluses, growing available resources, and lower debt levels.
• Despite lingering challenges, we believe that the university will maintain a strong market position, allowing for a gradual recovery in international enrolments.
• We are revising our outlook on UNSW to stable from negative and affirming our 'AA+/A-1+' issuer credit ratings.

Rating Action

On July 21, 2022, S&P Global Ratings revised its outlook on University of New South Wales (UNSW), an Australian public university, to stable from negative. At the same time, it affirmed its 'AA+/A-1+' issuer credit ratings on the university.

Outlook

The stable outlook reflects our view that UNSW will maintain its strong market position, while managing its budgetary pressures such that its operating margins will roughly balance, available resources will remain more than 35% of expenses, and debt levels relatively low. We also expect that our assessment of the university's role and link to the Australian government will not change.

Downside scenario

We could lower our ratings in the next two years if UNSW's financial profile weakens. This could be evidenced by available resources falling beyond our expectation, persistent operating deficits, or a substantial rise in debt.

Upside scenario

Although unlikely in the next two years, we could raise our ratings on UNSW if the university were to increase its available resources and endowments to similar levels of 'AAA' rated peers, while keeping debt low or if the likelihood of government support strengthened.

Rationale

The outlook revision reflects our view that pandemic-related risks to UNSW's finances and operations are receding. We believe UNSW's strong reputation will continue to attract solid student demand and that the university will maintain a high level of financial resources and low annual debt service. Our ratings on UNSW are supported by the university's strengthening financial position and declining debt. UNSW is likely to continue displaying fiscal flexibility to support its financial position.

Our ratings on UNSW reflect its standalone credit profile, which we assess at 'aa+', based on its extremely strong enterprise and financial profiles. 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. Together, these result in an issuer credit rating of 'AA+'.

Enterprise profile underpinned by UNSW's quality reputation; student numbers to recover after two years of COVID-19 disruption

We consider the global higher-education sector to be low risk. It tends to be characterized by countercyclical revenues, considerable barriers to entry from startups, and stable but slim industry profit margins. However, the COVID-19 pandemic has buffeted the finances of universities across the globe and severely tested their management teams (see "Outlook For Global Not-For-Profit Higher Education: Out Of The Woods, But Not Yet In The Clear," published Jan. 21, 2022).

We expect domestic demand for higher education to remain resilient. Australia's wealthy and diversified economy--with a GDP per capita of about US$63,600 in 2022--supports the fundamentals of its higher-education sector. With high vaccination coverage, the state of New South Wales (NSW) has phased out virtually all COVID-19-related public health restrictions. UNSW's domestic campuses are open, after mandatory closures during parts of 2020 and 2021, though many classes are being delivered through a mix of on-campus and online modes.

As we previously anticipated, international student numbers could take several years to recover. In December 2021, the Australian government reopened the country's international borders after having sealed them to inbound travelers for two years. Lockdowns and travel restrictions in China stemmed student flows this year from an important source market.

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 70th in 2022 and QS University ranking of 45th in 2022. We believe a well-executed 2025 strategy--to focus on becoming a leading research and teaching university--could improve its ranking. The NSW Auditor-General audits its accounts and the report is tabled in the NSW parliament.

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 90.2 (of a possible 99.95) in 2021 is well above the national average and one of the highest in Australia. In 2021, postgraduate students accounted for about 26% of total students. International students represented 35% 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. Based on application rates, demand from new domestic students remains robust. We believe this will continue, given UNSW's high global rankings. Total full-time equivalent student numbers exceed 47,000 as of Dec. 31, 2021.

The university showed its financial acumen over the past two years by deferring nonessential and many infrastructure projects that weren't underway. 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 delayed some short-term spending, such as for campus activities when students were unable to attend.

UNSW appointed an experienced new vice-chancellor, Professor Attila Brungs, and a new chief financial officer, Elizabeth Stratford, in January 2022. The university continues to attract high-caliber executives who execute consistent strategies and identify and address financial and operational risks.

Recovering operating position and lower debt is improving the university's financial profile

UNSW's financial profile has improved to extremely strong. Supporting our opinion are the university's stronger operating surpluses and lower debt levels than we previously expected.

UNSW's adjusted operating margins outperformed our previous expectations. Operating margins improved to 3.9% in 2021 from 3.2% in 2020. We expect the university's margins to narrow and roughly balance over the next two years. We exclude a few nonrecurring items from our measure of operating revenue (and expenses). The largest of these revenue items is A$100 million in Australian government financial assistance, specifically from the Research Support Program received in 2021. We also adjust one-off A$95 million investment income related to Education Australia Ltd.

UNSW responded 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 effects. Staff redundancies undertaken in 2020, at the height of the pandemic uncertainty, 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 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 sector wide operating margins (see "Australian University Finances Under COVID-19: Degrees Of Discomfort," published April 26, 2021). However, a three-year government transition fund should mitigate the financial effect.

UNSW has ample levels of unrestricted financial resources and robust financial policies. We expect the university to maintain financial resources well above 35% of operating expenses and higher than 2x its total debt. Its consolidated cash and investments increased to 6.4x total debt in 2021 from 3.3x in 2020. UNSW's available resources has grown since the onset of the pandemic, due to strong investment returns and internal cash generation. We expect the value of these assets to remain elevated despite current market volatility. This is because a large proportion of these assets is held in cash, term deposits, and other defensive assets. 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.

Our view of UNSW's maximum annual debt service has improved. On our measures, it stands at about 0.92% of operating expenses, down from 2.35% last year. In October 2021, the university repaid and terminated two of its drawn bank lines--totaling A$150 million--which were maturing in April 2022. This reduced debt levels to about A$263 million. UNSW's debt levels and service costs are relatively low compared with its international peers. The university's liquidity is strong/improving.

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

Our view of a moderately high likelihood of extraordinary government support reflects our assessment of UNSW's important role and strong link to the Australian government.

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 believe recent government funding reforms haven't weakened 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.

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 closure inhibited 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. For more information, see the criteria article "Environmental, Social, And Governance Principles In Credit Ratings," published Oct. 10, 2021.

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• 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

• Slow Burn For Australia Student Return, April 13, 2022
• Outlook For Global Not-For-Profit Higher Education: Out Of The Woods, But Not Yet In The Clear, Jan. 21, 2022
• Australia, Canada, Mexico, And U.K. Universities Medians Report: Credit Metrics Remain Largely Stable Through Persistent Headwinds, July 1, 2021
• Australian University Finances Under COVID-19: Degrees Of Discomfort, April 26, 2021
• Australian Universities Go From Boom To Zoom, April 26, 2021

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