Credit rating downgrade highlights risks for UK universities

A credit rating downgrade for seven UK universities is likely to have a limited effect on them or the higher education bond market, but warnings on the sector’s financial outlook should be heeded, according to finance experts.

The Moody’s decision to downgrade a number of “sub-sovereign entities”, including the universities, followed on from its earlier downgrade for the UK’s sovereign rating – to which it sees the university ratings as linked – amid concerns over the economic impact of Brexit.

The downgraded universities all secured credit ratings in order to borrow via publicly traded bonds. The universities of Liverpool, Leeds and Southampton were downgraded from Aa2 to Aa3, as were Cardiff, De Montfort and Keele universities; the University of Manchester from Aa1 to Aa2.

However, the University of Cambridge retained its Aaa rating – stronger than the UK government’s Aa2 rating.

Some universities have seen low interest rates as offering a chance to borrow on the bond markets to finance new buildings, with government capital funding slashed. Cambridge’s 40-year bond is the largest in UK higher education, at £350 million.

Moody’s said that the universities' downgrade reflected not just the UK sovereign downgrade but also “Brexit-specific sector risks”, such as potentially lower international student recruitment.

“Given the current climate of weakened student demand and increased competition, Moody's expectation is that some universities will be unable to realise their revenue targets,” it added.

The universities downgraded will not see their bond interest rates change as a result – those are fixed for the term of the bond.

The impact of the downgrade was likely to be “negligible” for the institutions and the university bond market more widely, said Marc Finer, KPMG’s Capital Advisory Group lead for strategic debt financing advice to the higher education sector.

Investors would still see the universities in question as institutions with “very strong credit quality – as good as any strong corporate, better in some respects because of the history of the institutions and the implicit sovereign connection”, he added.

Bob Rabone, who retired as University of Sheffield chief financial officer earlier this year, said the Moody’s observations on higher education highlighted “basically the same risk identified by Hefce [the Higher Education Funding Council for England] increasingly in the last two years: not everyone can be right in their aspirations and that to borrow, spend capital and expect student numbers and research revenue to [in total] rise is at odds with market demand and conditions”.

john.morgan@timeshighereducation.com