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Press Release: S&PGR Affirms Australian National University Ratings; Stable

30 Jul 2018 4:29 am
 
 
The following is a press release from S&P Global Ratings: 
 
     -- Our ratings on the Australian National University (ANU) are supported 
by its excellent market position and reputation, robust operating margins, 
high level of financial resources, and low annual debt service. 
     -- ANU also benefits from a high likelihood of government support because 
of its very important public policy role and strong link to the Australian 
government. 
     -- We are affirming our 'AA+/A-1+' long- and short-term ratings on ANU. 
     -- The stable outlook reflects our expectation that ANU will maintain its 
excellent market position and financial metrics during the next two years. The 
stable outlook also reflects our view that ANU's role and link to the 
Australian government are likely to remain unchanged. 
 
MELBOURNE (S&P Global Ratings) July 30, 2018--S&P Global Ratings today 
affirmed its 'AA+' long-term foreign and local currency and 'A-1+' short-term 
issuer credit ratings on the Australian National University. The outlook is 
stable. 
 
The stable outlook reflects our expectation that, within our two-year rating 
horizon, ANU will maintain its excellent market position and student demand 
profile, which will help it to continue to post robust operating margins. At 
the same time, we expect that ANU's debt burden will be largely stable, that 
its level of financial resources will remain high even after new capital 
expenditure, and that its relationship to the Australian government is likely 
to remain unchanged. 
 
Downward pressure on the ratings is unlikely in the near term, but could occur 
if ANU's enterprise or financial profiles were to weaken significantly. The 
enterprise profile could weaken, for instance, if student perceptions of ANU's 
reputation and prestige deteriorate, resulting in a large drop in demand. The 
financial profile could weaken if the Australian government substantially 
reduces its financial support for ANU beyond the recently announced changes to 
Commonwealth Grant Scheme arrangements or if future expenditures are much 
larger than expected, resulting in a decline in financial resources and the 
need for new borrowing. 
 
Upward pressure on the ratings could occur if ANU were to develop more diverse 
revenue streams that support high and sustained operating margins. Upward 
pressure could also eventuate if ANU were to demonstrate greater revenue and 
expenditure flexibility through, for example, accumulating a large endowment 
fund like some of its 'AAA' rated peers. These factors could help to support 
ANU's financial profile during periods of stress. 
 
The ratings on the Australian National University (ANU) 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 that there is a high likelihood that the Australian government 
would provide extraordinary support to ANU in a distress scenario. 
 
--Excellent reputation and performance in international rankings help to 
sustain student demand-- 
ANU, established by an act of parliament in 1946, is a midsize, 
research-intensive university with a main campus located in Canberra, 
Australia's capital city. Its performance in global university rankings 
underpins its competitive position. It placed 48th in the Times Higher 
Education World University Rankings in 2018 and 97th in the Academic Ranking 
of World Universities in 2017. It is also the highest-ranked Australian 
university in the 2019 edition of the QS World University Rankings, placing 
24th. ANU leads the nation in research, with 95% of its research recognized as 
being 'above' or 'well above' world standard in the latest Excellence in 
Research for Australia (ERA) results. 
 
We consider the higher education industry globally to be low risk because it 
tends to be characterized by countercyclical revenues, considerable barriers 
to entry from start-ups, and stable but slim industry profit margins. 
Australia's wealthy economy, with a GDP per capita of around US$61,000, 
supports the fundamentals of the domestic higher education sector. 
 
Student quality at ANU is high, as evidenced by the fact that new commencing 
students have an average Australian Tertiary Admissions Rank of 94 (out of a 
possible 99.95), which is well above the national average of about 69. In 
addition to students, ANU is able to attract first-rate faculty members. Some 
88% of its academic staff hold a PhD qualification, the highest proportion in 
Australia. There are six Nobel laureates among ANU's alumni and staff, 
including the vice-chancellor (the university's president and chief executive 
officer), Professor Brian Schmidt AC. 
 
Growth has been robust during the past few years. Full-time equivalent student 
numbers, excluding those in nonaward programs, grew by 10% last year to about 
18,600. ANU's retention rate for undergraduates remains high, at about 86% in 
2017. The university guarantees accommodation for all first-year, 
first-semester undergraduate students. Compared with its domestic peers, ANU 
has a large postgraduate cohort, with postgraduate enrolments representing 
about 44% of its full-time equivalent student base. We expect growth in 
student numbers to remain strong in 2018, but to moderate in future years. 
 
We note that ANU is in the process of introducing a new model for student 
admissions. From 2020, all undergraduates admitted to the university will be 
required to demonstrate evidence of having participated in cocurricular 
activities or community service alongside their secondary studies, and from 
2021 they will also be required to have taken English and mathematics in their 
senior secondary studies. It is too early to assess what effect this new model 
will have on student demand. 
 
The university is governed by a 15-member council, seven members of which are 
appointed by the federal minister for education and training. Day-to-day 
management is delegated to the vice-chancellor. The current vice-chancellor 
was first appointed for a five-year term in January 2016. ANU is a member of 
Australia's elite, research-focused "Group of Eight" universities, as well as 
the International Alliance of Research Universities and the Association of 
Pacific Rim Universities. Like all of its domestic peers, ANU is accredited by 
the Tertiary Education Quality and Standards Agency (TEQSA), the Australian 
government regulator. ANU produces financial statements on a calendar-year 
basis and is audited by the Australian National Audit Office. Like its peers, 
ANU does not release interim or half-yearly results. Its annual reports are 
tabled in the Australian parliament. 
 
--High level of financial resources and low debt service, though strong 
operating margin driven largely by international student fees-- 
ANU derives its revenue from a range of sources, including Commonwealth Grant 
Scheme (CGS) funding, research grants, tuition fees, and funding from 
government departments for commissioned research. The university has an 
excellent track record in winning competitive grants from the Australian 
Research Council, the National Health and Medical Research Council, and other 
grant providers. Uniquely among Australian universities, ANU also receives 
about A$197 million from the Australian government in the form of a National 
Institutes Grant, which allows it to pursue research in areas of public policy 
priority. 
 
In December 2017, the Australian government announced changes to its 
higher-education policy settings with immediate effect. For 2018 and 2019, the 
government will cap the funding it provides to universities under the CGS, 
which supports the teaching of domestic bachelor degree students, at 2017 
levels. From 2020, CGS funding will resume growing, in line with adult 
population growth, but only if universities meet certain performance 
requirements, which the government has not yet specified. We believe these 
changes will have minimal impact on ANU, given its smaller undergraduate 
cohort and strong revenue streams from other sources, particularly 
full-fee-paying students, who are unaffected by the CGS changes. The December 
2017 announcement replaces an earlier package of government reforms, proposed 
in the 2017-18 fiscal budget, that did not pass the Australian Senate. 
 
ANU has posted average operating margins of 9.4% of total operating expenses 
between 2015 and 2017, based on our three-year weighted-average measure. The 
very strong operating result of 15% in 2017 was mainly due to improved income 
from foreign students and, to a lesser extent, increased research funding. 
Expenses growth was primarily driven by employee-related expenses and 
severance payments under a voluntary early retirement scheme. During 2017, ANU 
negotiated a new enterprise agreement with its workforce, which will see 
salaries for permanent employees increase 2% in 2018-2019, A$1,800 in 
2019-2020, and 2% per annum thereafter. ANU's revenue flexibility is somewhat 
limited by legislated caps on domestic student tuition fees, and expenditure 
flexibility is constrained by the high proportion of employee expenses in its 
cost base. 
 
Like its domestic peers, ANU has benefited from rapid growth in fee-paying 
foreign students, particularly from North Asia, and we expect this trend to 
continue in the near term. Revenue from fee-paying onshore foreign students 
grew 33% year on year in 2017 to A$249 million. Foreign students make up about 
40% of ANU's full-time equivalent student base. We consider that the 
concentration in students from North Asia presents an element of risk to 
Australian universities, particularly because student flows could be 
susceptible to geopolitical factors that are outside of a university 
management's control. Nevertheless, we believe ANU would likely maintain sound 
operating surpluses if foreign student demand were to ebb. 
 
ANU is currently in the middle of a large capital development program. 2017 

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July 30, 2018 00:29 ET (04:29 GMT)
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