Overview

• UoM is raising A$200 million from a new seven-year fixed-rate note issuance on Aug. 22, 2022. This will take total debt, including leases, to A$1.45 billion from A$850 million in December 2021.
• UoM's abundant financial resources and strong operating surpluses underpin its very strong financial profile. These strengths counter rising debt and debt servicing costs.
• We believe that the university will maintain a strong market position, allowing for a gradual recovery in international enrolments over the next few years.
• Therefore, we are affirming our 'AA+/A-1+' long-term and short-term ratings on UoM. The outlook is stable.

Rating Action

On Aug. 19, 2022, S&P Global Ratings affirmed its 'AA+/A-1+' long-term and short-term foreign and local currency issuer credit ratings on the University of Melbourne (UoM). The outlook is stable.

S&P Global Ratings also assigned its 'AA+' long-term rating to the A$200 million fixed-rate note due Aug. 22, 2029.

Outlook

The stable outlook reflects our expectation that UoM will maintain an exceptional market position, positive operating margins, abundant financial resources, and stable debt levels. We also expect UoM's role and link to the Australian government will not change.

Downside scenario

Downward pressure on the ratings could eventuate if UoM's enterprise or financial profiles were to weaken significantly. This could occur if lower enrolments or inflationary pressure push operating margins into deficit, requiring the university to draw down its available resources or increase debt.

Upside scenario

We could raise our ratings on UoM if its available resources were to rise in line with 'AAA' rated peers. These factors could support UoM's credit profile at a higher rating level during periods of stress.

Alternatively, we could raise the rating if the likelihood of government support strengthened.

Rationale

UoM's global reputation will continue to attract strong student demand, and the university will maintain high levels of financial resources and strong performance going forward. Although the pandemic has disrupted UOM's operations in the past two years, the effect on its financial performance and debt levels was fairly muted in comparison. While debt levels and servicing costs are rising, UoM only uses debt to pre-fund future capital projects as opposed to covering pandemic related losses.

We believe that healthy student demand and robust liquidity will help the university maintain its credit metrics over the next several years despite lingering risks from the protracted pandemic.

Our ratings on UOM reflect its stand-alone credit profile, which we assess at 'aa+', based on its extremely strong enterprise and very strong 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.

UoM is the highest-ranking university in Australia

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 Victoria has phased out virtually all COVID-19-related public health restrictions. UoM'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.

In our opinion, student quality metrics continue to demonstrate strength. The university's full-time equivalent (FTE) students almost fully recovered in 2021, increasing by 4%. International students represent 50% of the university's student base. We anticipate international student numbers could take several years to recover from the pandemic. For example, lockdowns in China stemmed the return of Chinese students in 2022. In December 2021, the Australian government reopened the country's international borders after having sealed them to inbound travelers for two years.

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 33 in the Times Higher Education list and 32nd globally in the 2022 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 93.4 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 54% of UoM students were postgraduates in 2021. In addition, UoM retains about 91% 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.

UoM is holding more financial resources as debt levels and servicing costs rise; Operating margins outperforming expectations

We expect debt levels to increase substantially in 2022. We forecast debt, including leases, to be A$1.45 billion following recent bond issuances, up from about A$850 million in December 2021. UoM is raising A$200 million in August via a medium-term note issuance.

In 2021, the Melbourne Connect project was capitalized on the university's balance sheet. UoM entered into a 42-year finance lease, it was valued at A$267 million.

UOM's maximum annual debt service will rise as a result of additional borrowing. We anticipate annual debt service to more than double to about 5% of operating expenses in 2022. It was 2.35% in 2021.

We believe that available resources will decline from their elevated levels as UoM pays for its infrastructure rollout. Available resources are temporarily higher due to timing mismatches between borrowing and spending plans. We believe available resources could be as high as A$1.8 billion in August 2022. In December 2021, these available financial resources were approximately A$1.252 billion, covering about 48.5% of operating expenses.

UoM's investment portfolio rebounded strongly between the onset of the pandemic and December 2021. Given market volatility the value of its portfolio may have diminished slightly in recent months. In saying this, financial resources received a healthy bump from recent borrowing being held until capital projects are ready to be delivered. Our definition of 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. They exclude UoM's endowment fund of A$1.3 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 operating margins have exceeded our expectations. The university's average operating margins improved to 11.4% of operating expenses in 2021, from 7.6% in 2020. We expect margins to narrow from this high level in coming years and remain more than 5%. These margins are high compared with international peers.

The negative effect of the pandemic was minimized by savings measures and a one-off government support package of A$103 million in 2021 to support research and research capability, supporting a strong operating surplus. We expect UoM to tightly manage its costs, including pay outcomes, potentially reducing staff headcount, and deferring capital investment and discretionary spending to support financial outcomes. UoM achieved about A$360 million in operating savings in 2020 and exceeded its A$250 million target for 2021.

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.

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 market 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 university uses external investment management firms to manage its large investment holdings. Two- to three-year forecasts and capital plans identify potential issues, similar to its domestic peers. In line with domestic industry norms, 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, reflecting our assessment of UoM's important role and strong link to the Australian government.

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 stemmed 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. 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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