Overview

• On April 24, 2023, S&P Global Ratings published its revised criteria "Global Not-For-Profit Education Providers" and placed the ratings on University of Wollongong (UOW) under criteria observation (UCO).
• We have completed our review of the Australia-based university. In accordance with the new criteria, our assessment of a weaker financial profile within the new criteria results in a stand-alone credit profile of 'a+'. We have removed UOW from under criteria observation.
• Consequently, we lower our long-term local and foreign currency ratings on UOW to 'AA-', after factoring in the likelihood of government support. The short-term ratings remain 'A-1+'.
• Our outlook on UOW is stable.

Rating Action

On June 27, 2023, S&P Global Ratings lowered its long-term issuer credit ratings on UOW, an Australian public university, to 'AA-'. At the same time, it affirmed its 'A-1+' short-term issuer credit ratings on the university. The outlook is stable.

Outlook

The stable outlook reflects our view that international student enrolments will improve after the COVID-19 pandemic. Growing enrolments should improve operating margins. Further, we expect annual debt service will diminish over the next two years.

Downside scenario

Although we view it as unlikely, we could lower our ratings on UOW should its financial profile weaken. Evidence of this could be cash and investments falling permanently below 60% of operating expenses, and operating margins and annual debt service not improving as we expect.

In addition, we would lower our ratings on UOW if our assessment of the likelihood of extraordinary support from the Australian government were to weaken significantly, all else being equal.

Upside scenario

We could raise our ratings on UOW if its operating margins returned to surpluses of more than 1% of operating expenses, and its maximum annual debt service diminished to less than 4% of operating expenses, all else constant.

Rationale

The lowering of our rating on UOW reflects the application of our new criteria. This is based on our assessment of a very strong enterprise profile and strong financial profile for the university. Our assessment of a weaker financial profile based on the criteria update leads us to lower the stand-alone credit profile to 'a+'.

The ratings also reflect our opinion that there is a moderately high likelihood the Australian government would provide extraordinary support to UOW in a financial distress scenario. Together, these result in an issuer credit rating of 'AA-'.

Solid market position underpins enterprise profile; student numbers to recover after two years of COVID-19 disruption. 

Our rating on UOW derives support from our assessment of the higher education sector as a low-risk industry. The sector has low competitive risk compared with other sectors because it is anti-cyclical in nature. The university benefits from excellent economic fundamentals, as measured by Australia's wealthy and diversified economy--with a GDP per capita of about US$63,140 in 2023.

Student quality at UOW is strong. New commencing students had a mean Australian Tertiary Admissions Rank of 68.65 out of a possible 99.95 in 2021. UOW's international reputation is robust, particularly among younger universities, as indicated by its ability to maintain its position among the top 1% of universities in the QS World University ranking and Times Higher Education Young University Rankings (24th in 2022). In the overall Times Higher Education World University Rankings for 2023, UOW places in the 201st-250th bracket. UOW is a member of the University Global Partnership Network and the NUW Alliance.

Fulltime equivalent student numbers, excluding college students and those in non-award programs, stood at about 21,900 in 2022. The 5.3% decline from 2021 primarily reflects lower onshore enrolments of international students who could not attend due to border closures during the pandemic. We expect international student enrolments to improve over the next two years. UOW's first-year retention rate remains strong, at about 84% in 2022. UOW is one of only a handful of Australian universities to offer an accommodation guarantee for new commencing undergraduates. The federal Labor government's commitment to fund up to 20,000 additional university places for Australian students will help the sector cope with a looming demographic hump of high-school graduates.

In our view, UOW's management expertise and governance practices, as well as financial management policies, are very strong and in line with those of other domestic peers. A 17-member council governs the university. The New South Wales (NSW) minister for education appoints two members, while other members are appointed by the council, elected by staff or students, or serve in an ex officio capacity. The vice-chancellor, who is the university's principal and chief executive officer, is responsible for day-to-day management. The university has appointed an interim chief operating officer--Peter Janu, who was Executive Director of Commercial and Legal at UOW Global Enterprises.

UOW is accredited by the Tertiary Education Quality and Standards Agency (TEQSA), an Australian government regulator. UOW produces financial statements on a calendar-year basis and is audited by the Audit Office of NSW. Its annual reports are also tabled in the NSW parliament. Like its peers, UOW does not release interim or half-yearly results. We base our analysis on the university's consolidated financial statements, which incorporate all its 100%-owned subsidiaries, including UOW Global Enterprises.

Unlike most of its Australian peers, UOW is a multinational enterprise. We believe that its offshore operations, in countries with different political and regulatory systems to Australia, indicate a higher risk appetite than its peers. Through its wholly owned UOW Global Enterprises subsidiary, UOW operates campuses in Dubai, Hong Kong, and Malaysia, educating about 5,000 combined fulltime equivalent students. UOW College Hong Kong opened a new campus in 2021.

UOW was incorporated as a public university by an act of the parliament of NSW in 1975. Its main campus is in the coastal city of Wollongong, about 80km south of Sydney, Australia's second largest city, and it has several small satellite campuses across NSW.

Financial profile reflects weak operating position and high debt service. We expect UOW's operating position to improve over the next few years from its weak position. We anticipate increasing international student numbers to provide a boost to the university's revenues, balancing inflationary pressures. The operating position is likely to be a small deficit in 2023, before moving into a surplus in 2024 and beyond.

In 2022, the university posted a large adjusted operating deficit of 5.7% of operating expenses. Employee expenses grew in 2022, as wage rises recommenced after being frozen in 2021. We exclude from our measure of operating expenses several nonrecurring items, such as an early bond repayment expenses and termination costs. The university continues to focus on expenditure control while maintaining capacity to deliver outcomes.

UOW derives its revenue from a range of sources, including Commonwealth Grant Scheme (CGS) funding for bachelor-level places, tuition fees, research grants, consultancy work, and investment income. Compared with other rated Australian universities, UOW is generally more dependent on CGS and tuition revenue and less on income from financial investments and research. It also earns a higher proportion of research income from the private sector, reflecting its strength in applied research. Donations and bequests remain a relatively small contributor to income and financial assets.

The university is meaningfully scaling back its infrastructure investments, which we expect will help it to rebuild cash buffers. We expect capital expenditure to be less than A$50 million a year, about a third of historical levels.

We expect maximum annual debt service will decrease rapidly over our forecasts from its very high level. On our measures, UOW's maximum annual debt service stands at about 16% of operating expenses for 2022, reflecting the short nature of its maturity profile and repayments of inflation-indexed bonds. The university recently repaid its two inflation-indexed bonds worth A$62.5 million, reducing its debt stock outstanding. UOW plans to repay its A$150 million note in June 2024 and its 10-year A$175 million note due in 2027. The university's overall debt profile is rapidly amortizing, with all debt repayments due in the next five years. UOW's other outstanding debt consists of an eight-year, A$200 million fixed-rate note maturing in 2028. We incorporate operating lease liabilities in our measure of UOWs total debt, an update in our recent criteria change.

UOW's legacy defined-benefit superannuation (pension) schemes do not affect our assessment of its debt metrics. The Australian and NSW governments will meet the unfunded liability for UOW's superannuation obligations on an emerging-cost basis. Accordingly, the unfunded liabilities are recognized as a provision in the university's statement of financial position, with a corresponding asset recognized under receivables.

In our view, UOW's liquidity remains strong. Total cash and investments at the end of 2022 stood at A$566 million equivalent to 0.8x total debt, or 82% of operating expenses, on our three-year weighted-average measure. As UOW will use cash to repay debt, there could be temporary weakening in the cash and investments to operating expenses ratio until cash buffers are built up.

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

UOW 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 across regional NSW and helps to develop Australia's human capital. We don't believe recent government funding reforms have weakened this role.

UOW's link with the Australian government is strong. An indication of this is the latter's track record of funding and oversight of the higher-education sector. Although established under NSW state legislation, UOW is primarily accountable to the Australian government, which is also a major source of revenue through the CGS and various competitive research grant schemes. UOW reports on its spending of government funds to the Australian Department of Education. TEQSA regulates the university sector and sets standards that higher-education providers must meet to maintain their registrations. In addition, the Australian government administers the Higher Education Loan Program, an income-contingent loan scheme used widely by domestic students.

Environmental, Social, and Governance

We believe the health and safety social risks posed by the pandemic are abating for the higher education sector. But given the pandemic's significant effects on modes of instruction and enrolment trends over the past three years, we believe a future public health event of similar size and scope could again affect demand and finances. We evaluated Wollongong's environmental and governance factors and found them to be neutral in our credit analysis as a whole.

Table 1

Related Criteria

• Criteria | Governments | General: Global Not-For-Profit Education Providers , April 24, 2023
• 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: Rating Government-Related Entities: Methodology And Assumptions , March 25, 2015
• General Criteria: Principles Of Credit Ratings , Feb. 16, 2011

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