In general, public universities outside of the U.S. rated by S&P Global Ratings have weathered the pandemic without substantial impacts on their credit profiles, despite a lack of material extraordinary funding from supporting governments. However, we observed some weakening in fiscal 2023 financial medians due to the combined impact of inflation-related increases in personnel and capital expenses, as well as restrictive domestic tuition regimes and flat government funding. We expect changes to government policies in Australia, Canada, and the U.K. will result in lower enrollment of high-fee-paying international students, exacerbating these pressures in the next several years. However, rated institutions in these countries tend to have strong demand profiles and high levels of financial resources, which help to buttress their credit profiles.

As of Oct. 31, 2024, S&P Global Ratings had 22 ratings on public universities outside of the U.S., with nine ratings on institutions based in Canada, five each in Australia and the U.K., and three in Mexico. This is a much smaller number than the 145 ratings in the U.S. Accordingly, changes in median metrics might represent the variability associated with a small sample size, rather than wholesale differences in credit quality. Issuers, in general, are highly rated, with 86% of institutions rated in the 'A' or 'AA' category; only the three Mexican institutions are rated in the speculative-grade category. Since the beginning of 2024, we have not raised the ratings on any universities but did lower the ratings on two. We lowered our rating on La Trobe University, in Australia, to 'A+' from 'AA-' due to an increasing debt burden and debt service costs, and lowered the rating on the University of British Columbia, in Canada, to 'AA-' from 'AA' after a similar downgrade on the supporting Province of British Columbia. In addition, we revised the outlook to positive on the University of Western Ontario.

All data and ratings included in this report are as of Oct. 31, 2024. S&P Global Ratings publishes these medians as general benchmarks to observe broader industry trends. The credit analysis for any institution involves an assessment of qualitative factors that are beyond the scope of this article. Therefore, these medians should not be considered thresholds to achieve a particular rating.

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Table 2

Chart 1

Chart 2

Enrollment And Demand Medians

Enrollment is demonstrating more volatility after many years of stable growth

Fiscal 2023 saw very modest 0.6% growth in median full-time equivalent (FTE) enrollment following a slight decrease in fiscal 2022. Volatility at rated Australian universities, particularly in international student numbers, was a primary driver of change over the past two years.

Selectivity rates weakened throughout the pandemic, reaching 70.2% in fiscal 2022 (excluding Australian universities that don't report a comparable metric), as institutions looked to shore up their intake amid concerns about student mobility and shifting labor market conditions. They also reflect an increase in the number of applications to universities due, in part, to generally healthy domestic demand. In fiscal 2023, the median selectivity rate strengthened to 67.1%, although it remains substantially weaker than pre-pandemic norms. Public universities in the 'AA' rating category continue to demonstrate markedly greater selectivity, as befits their generally superior market positions, and domestic and international reputations.

Public universities have increased their efforts to support students through the difficulties of the past several years, which has helped maintain stable retention and graduation rates across all rating categories.

Chart 3

Financial Medians

Operating margins are still squeezed as enrollment mix shifts and government support remains flat

Shifting international enrollment, largely stagnant government operating grants, and inflationary pressures pushed the median operating margin down for the second year in a row, although it was still positive at 2.4% in fiscal 2023. Although the overall median performance at public universities in the 'AA' rating category was largely stable year over year, rated Australian universities have experienced more margin compression than those in other regions due to a slowdown in higher-fee-paying international student enrollment coupled with growth in staff wages and headcount.

The shift to greater dependence on student-derived revenue continued in fiscal 2023, with the median reaching 42.0% of operating revenue, up from 37.2% in 2019. This reflects the impact of flat or dwindling government operating support (in real terms) and restrictive domestic tuition regimes, which have effectively incentivized institutions in Australia, Canada, and the U.K. to pursue international students for the past decade or so in order to fund growth. Mexican public universities are substantially more dependent on federal and state transfers, which account for about 80% of operating revenue, and these have been fairly stable in the past several years, while international students are not a material source of enrollment or revenue.

Chart 4

Balance-sheet strength continues to support credit profiles

Rated public universities outside of the U.S. generally have robust levels of cash and investments and moderate debt burdens. This is particularly true among universities in the 'AA' rating category, which maintained extremely strong median cash and investments to operations and cash and investments to debt of 130.9% and 533.6%, respectively, in fiscal 2023. Mexican universities have less liquidity but also carry very little or no debt on their balance sheets, while Canadian universities are supported by larger endowments compared with those of Australian and U.K. institutions.

Overall financial resource medians fell in the past two years, as many universities tapped into their internal resources to fund capital expenditures in lieu of borrowing at higher interest rates, or in some cases, to cover operating deficits.

Chart 5

What We're Watching

Australia's higher education sector is in a state of rapid policy flux.   The inflow of international students rebounded strongly post-pandemic in 2023, but then slowed in the first half of 2024 as the government introduced Ministerial Direction 107 to tighten visa processing. The government also implemented tougher rules for English language standards and more than doubled the visa application fee to A$1,600 (US$1,100), one of the highest in the world. These measures were a response to perceptions that strong inbound migration has contributed to a domestic housing shortage.

In May 2024, the government further announced that it would cap new international enrollment from 2025 onward with caps to be implemented on an institution-by-institution basis. The proposed caps are yet to pass in parliament, but universities with higher concentrations or growth rates of foreign students (namely the prestigious inner-city institutions) have been told they will be subject to stricter caps. Regional universities will be allocated more generous caps and hope to draw foreign students away from the cities, but a large-scale shift is unlikely, in our view, given foreign students' preference for metropolitan living and close attention paid to global rankings. Most rated Australian universities have solid balance sheets and should be able to ride out the policy changes without a material impact on their credit quality, provided their management teams respond proactively (see "Australian Universities: Would International Student Caps Spur A Course Correction?," published June 11, 2024, on RatingsDirect). Some universities have already announced hiring freezes or layoffs.

An increase in the domestic undergraduate tuition fee cap would support U.K. universities' finances, albeit their performance would remain dependent on international students.   On Nov. 4, 2024, the U.K. government announced that the domestic undergraduate tuition fee cap will increase by 3.1%, to £9,535 in autumn 2025, after being unchanged for eight years. We think that this is an indication of the government's commitment toward addressing the challenges in the higher education sector and we expect the government will take additional steps. Furthermore, we view positively the government's commitment to research and development in the autumn budget, which included funding the U.K.'s association with Horizon Europe, the EU's key funding program for research and innovation. We think this will help protect the quality of U.K. higher education research-focused institutions and will reap benefits from closer cooperation with the EU.

The sector, though, will continue to depend on international tuition fees, which account for more than 20% of total income and continue to subsidize the cost of educating domestic students. At the same time, tighter restrictions on immigration, persistently high cost of living, and growing competition from domestic universities in emerging markets that are building stronger reputations will constrain the demand from international students (see "Your Three Minutes In The U.K. University Sector: Immigration Restrictions Dent Universities' Finances," May 21, 2024). Furthermore, inflationary pressures continue to lift operating costs while universities need to resume investments in campuses to maintain their attractiveness. Weaker financial performance could also lead to some consolidation in the sector. Of importance, the Office for Students, the sector's regulator, has recognized these financial headwinds and we think it is likely to expand its oversight and intervene to prevent failures in the sector.

We believe that universities with a solid reputation and brand name have better financial flexibility and capacity to absorb these potential pressures, while lower-ranked universities that rely on international students will be in a more vulnerable position. Considering a drop in overseas student numbers, we expect to see tougher competition for domestic students.

Canadian universities will see international enrollment drop.   The federal government reduced the number of new international undergraduate student permits that would be approved for this fall's incoming cohort by about 35% and recently announced that there will be an additional 10% cut in 2025. This will put a substantial dent in institutions' revenue in the near term given the increasing dependence on unregulated international student tuition over the past 15 years but could also have longer-term impacts on Canada's reputation as a welcoming destination for a widening and increasingly mobile market. We expect domestic demand in Canada will remain strong in the medium term, although absent material increases to domestic tuition rates or provincial operating grants, neither of which we anticipate in the near term, this will not be sufficient to offset lost revenue.

Although we expect that all rated public universities in Canada will be affected to some extent, the entities with the highest exposure to international students also tend to enjoy robust demand characteristics, including high international rankings, and should therefore see a more limited impact (see "Your Three Minutes In Canadian Higher Education: Federal Restrictions On International Student Visas Will Stem Revenue Growth," June 17, 2024). As well, rated Canadian universities have generally strong liquidity reserves, providing additional headroom to adjust to any material revenue volatility. However, in our view, management teams will need to take substantial actions to manage expenditures to mitigate the pressure on operating margins in the next few years, which could include workforce reductions, deferring or scaling back capital projects, and restructuring program offerings.

Appendix

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