Trends in HE: The rating game

September 20, 2002

Making your creditworthiness public is common in the US and a few enterprising UK institutions are joining the club. David Jobbins reports

In the next few weeks, two more UK universities will join a select group that has gone public with its creditworthiness ratings. So far, only a handful of UK universities have followed the path trodden by hundreds of US institutions that are regularly assessed for credit risk by companies such as Fitch, Moody's and Standard & Poor's. But with performance indicators, rankings and league tables already familiar - if controversial - features of the landscape, that number could rise as more universities test alternative ways of financing their activities.

While the main intention of credit ratings is to raise money in the markets, in the US they have become a proxy for relative excellence. A good rating makes money easier to secure in the capital markets and can lead to less demanding rates of interest on the loan. Universities over there have dealt with the money markets for credit for decades and ratings are closely followed.

Standard & Poor's alone rates the debt of more than 400 public universities in the US, using a range of demand and financial ratios. So far, one public university, the University of Texas System, has matched the Ivy League's with an AAA rating. But several have AA ratings, including the University of California System, Delaware, Maryland, Michigan, North Carolina-Chapel Hill, Virginia and Washington.

Outside the US, AAA ratings were assigned in 1998 to the bond-insured issues of four Spanish universities: Valencia, Universidad Politecnica de Valencia, Castellon, and Alicante. In Australia, an AA- rating was assigned to the bonds issued by Medical Centre Developments Pty Ltd to fund construction of medical facilities at La Trobe University, reflecting the underlying credit quality of the university. In Canada, Standard & Poor's has rated three of Ontario's 17 universities: Brock (A-) and Toronto (AA+), the country's oldest and largest university, have been rated since early 2001 and just two weeks ago, McMaster was given an AA rating.

In the UK, universities, as quasi-public bodies, have rarely ventured into the capital market to finance development, preferring the continuity offered by a close relationship with a bank. Now Standard & Poor's detects a culture shift as a small number of universities seeks ratings to assist in the financing of projects, or, more recently, as a validation of their managerial, financial and academic health.

The only agency rating universities in the UK, it has rated five higher education institutions since 1999: King's College London (AA-), Nottingham (AA-), Greenwich (BBB-), Lancaster (BBB+) and Sheffield (AA-). In addition, an AAA rating was assigned to the bond-insured notes issued by Owengate Keele plc, a special-purpose vehicle supported by fees from Keele's student accommodation.

King's was first in the field. Its involvement in a private finance initiative scheme led a prospective commercial partner to ask the agency for an evaluation. Initially the rating was for private consumption, but the college management was persuaded that there were benefits to be gained from going public with what was in effect a vote of confidence in its managerial, financial and academic strengths. The rating, Standard & Poor's convinced King's senior managers, would be of value to third-party investors.

When Sheffield secured an AA- in May, it was able to boast that its rating placed it on a par with leading US universities, above many household names such as Thames Water, Sainsburys, Cadbury Schweppes, Boots, Credit Lyonnais and BT, and just one notch behind Microsoft (AA).

David Bearpark, the university's director of finance, said: "It is significant because it is founded on a broad survey that takes in the university's academic and research quality, financial strength and strategic management record. The process has been thought-provoking and helpful for our management team, and the result represents an independent validation that will benefit our reputation nationally and internationally."

Greenwich was the first ex-polytechnic to be rated when it sought £20 million for development of its Maritime campus. But its rating slipped to BBB- this year and, in August, it quietly withdrew its rating, despite advice from Standard & Poor's to weather the downturn. A Greenwich spokesman said the rating had achieved its object in securing funding for the Maritime project. But the downgrading clearly influenced the decision to cut out the cost of a continued public listing.

Another former polytechnic is one of two institutions to be added to the ratings as early as next month, although it is not yet clear whether it will immediately opt for a public rating.

An initial rating costs £20,000. Nick Preston, director for public finance ratings at Standard & Poor's, predicts that more institutions will find it worthwhile as they are forced to look to alternative sources of finance away from central government funding and their bankers.

The company does not envisage all universities being rated, but argues that between 50 and 80 could benefit from public endorsement of their financial health.

However, Stephen Schaefer, Tokai Bank professor of finance at the London Business School, said: "It is possible that some universities might feel that their access to finance would be easier or less costly with a rating. It is hard to know whether this is the case, whether it is a defensive move on the part of universities or whether it might be in future.

"Ratings are supposed to provide a good forecast of long-term creditworthiness. As such, they should not have any systematic trend over time, either up or down. There is some evidence to suggest that the agencies may react to bad news 'in stages', and so when a company is downgraded, it is somewhat more likely to be downgraded in the future. The same is not true of upgrades."

Tim Jenkinson, reader in business economics at the Said Business School, Oxford, said: "The main consideration for universities is a fairly simple cost-benefit analysis trading off the not-insubstantial costs of being rated by one of the agencies against the possible benefits in terms of cheaper access to finance. A big consideration would be the amount of future borrowing that was planned."

Craig Jamieson, Standard & Poor's associate director for public finance ratings, said the company would seek preliminary financial and academic information, and then its analysts would spend a couple of days in meetings with senior university administrators. A ratings committee would then review the information and assign a rate that, according to the wishes of the institution, would - or would not - be publicly available.

Credit ratings
Extremely strong
AA+, AA, AA- Very strong
A+, A, A- Strong
BBB+, BBB, BBB- Good
BB+, BB, BB- Marginal
B+, B, B- Weak
CCC Very weak
CC Extremely weak

Please see Higher education trends 2002  in the Statistics section for charts and tables giving a comprehensive picture of Britain's higher education system and its evolution over two decades.

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