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What's Behind Our Sector View

Public institutions are well positioned in their markets.  Rated universities outside of the U.S. exhibit generally strong demand characteristics, which will help to mitigate some of the revenue volatility stemming from constrained government funding and an expected dip in international enrollment in the near term.

Balance-sheet strength provides a bulwark against operating pressure.  We expect that many rated universities will experience some degree of weakening in their financial performance in 2025. However, generally robust levels of cash and investments and moderate debt burdens will help sustain their credit profiles.

Management teams need to take firm action to control spending.   The consensus style of governance typical of public universities can hinder their ability to enact sufficient countermeasures efficiently in times of rapid market changes or acute operating pressures. Management teams will be tested in their ability to adjust operations to prevent a material weakening in credit metrics in the near-to-medium term while maintaining long-term strategic goals.

Sector Top Trends

Australia's higher education sector is in a state of rapid policy flux

The inflow of international students to Australia rebounded strongly post-pandemic in 2023, but then slowed in 2024 as the government tightened visa processing, 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 political response to perceptions that high 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. However, the enabling legislation now seems unlikely to pass parliament, given a surprising last-minute alliance between the center-right Coalition and left-wing Greens to block it. This will exacerbate uncertainty for the sector, as many universities had already curtailed or suspended making offers to new international students for 2025.

The impact of the legislative withdrawal will be uneven, with prestigious inner-city institutions, which would have been subject to stricter caps, benefiting more than regional institutions. The Australian government has signaled that in the absence of caps, it will revert to using "ministerial direction 107" (MD 107) as the primary mechanism for controlling the inflow of international students. Throughout 2024, MD 107 has led to slow visa processing and high refusal rates for all international education providers except a small handful of "tier 1" universities.

We think 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. Some universities have already announced hiring freezes or layoffs. But we also anticipate the difficult policy environment will persist into 2025, as a federal election fuels debate around Australia's high levels of immigration.

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 this is an indication of the government's commitment to 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 still 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 rising competition from domestic universities in emerging markets will constrain the demand from international students. 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 will likely 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.

Federal policy changes will drive down international enrollment at Canadian institutions

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 will enact an additional 10% cut in 2025 and extend the cap to graduate students. This, together with other policy changes affecting international students, will put a substantial dent in some institutions' revenue in the near term, given increasing dependence on unregulated international student tuition in the past 15 years. Of longer-term concern is the potential further deterioration of Canada's reputation as a welcoming destination for an expanding and increasingly mobile market. We expect domestic demand in Canada will remain high 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 by the drop in international student numbers, the entities with the highest exposure also tend to enjoy robust demand characteristics, including superior international reputations, and should therefore see a more limited impact. As well, rated Canadian universities have generally strong liquidity reserves, providing additional headroom to adjust to revenue volatility. Management teams will need to take decisive action to control spending 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.

Postsecondary education policies aren't likely to alter materially under Mexico's new government

Mexico's new president was elected in part due to her support for popular reforms focusing on reducing poverty and inequality initiated during her predecessor's mandate. Therefore, we expect that federal and state transfers to public universities, which account for about 80% of total institutional revenue, will remain stable, although total system funding has fallen in real terms in recent years.

The Mexican government has made efforts to expand the capacity of public universities to improve access to postsecondary education, especially for lower-income families, and we expect that the domestic market will remain healthy. However, funding has not been sufficient for institutions to fully accommodate demand and given their limited revenue flexibility, we believe rated Mexican universities must continue their efforts to prudently manage their expenditures to avoid deterioration in financial performance.

Universities will need to rein in spending in response to heightened operating pressures

For many years, government operating funding in the countries outside of the U.S. where we rate public universities has not kept pace with the rise in expenditures. For their part, universities, particularly in Australia, Canada, and the U.K., have felt compelled to spend more on campus amenities, facilities, and student services to stand out in an increasingly competitive market for high-fee-paying international students. As this source of incremental revenue growth looks to be throttled back, at least in the near term, university management teams will need to take decisive actions to minimize the impact on institutional credit profiles.

Employee-related costs account for the lion's share of university operating expenses and administrative units typically bear the brunt of the first wave of institutional budget cuts, along with the deferral of non-essential capital projects. Already we have seen hiring freezes and staff reductions at some rated universities. However, to prevent substantial operating deficits and a material rundown of university resources, we expect that some universities will need to look deeper, for example at trimming course offerings, merging or cutting academic departments, and reducing faculty, all of which carry the likelihood of escalating labor tensions.

Domestic demand will remain robust in the medium term

Although demographic projections indicate that universities we rate will continue to benefit from strong domestic demand, in Australia, Canada, and the U.K., these generally assume a steady influx of immigrants, given falling natural birth rates in many developed countries. Recent policies that explicitly seek to reduce net immigration threaten to not only stifle the lucrative international student market, but could, over the longer term, shrink the university-age population, as is currently expected to occur in the U.S. Mexico, however, has a very large youth cohort, which we expect will sustain enrollment, boosted by government efforts to increase post-secondary participation rates.

Debt issuance will be muted

In response to rising operating pressures, many universities have deferred or scaled back their capital plans and we do not expect material net new borrowing in 2025. For critical, or non-deferrable capital projects, universities will likely draw from internal resources, which remain generally healthy and recently have benefited from strong market returns. If liquidity levels drop materially and interest rates continue to moderate, we may see an uptick in borrowing in the next several years.

Of note, the only Mexican university that has outstanding long-term debt is Universidad Autonoma de Nuevo Leon and we do not expect additional borrowings by any of the three rated Mexican universities in the next two years.

AI presents risks and opportunities

Generative AI has already disrupted pedagogical practices in many fields of study, with students often driving innovative uses ahead of universities' ability to adapt their policies and procedures. This technology is also being employed in ever-more frequent and sophisticated cyber attacks against institutions. However, it's also helping to expand and create new research avenues that could enhance institutional reputations and attract additional funding. AI has the potential to help administrations better identify and understand enterprise risks and their interdependencies, and achieve cost efficiencies, allowing them to reduce or more effectively deploy personnel and resources. We expect institutions will continue to direct substantial investment toward improving their digital infrastructure as well as training and recruiting qualified staff and faculty.

Ratings Performance

Two downgrades in 2024 but outlooks remain predominantly stable heading into 2025

As of Dec. 1, 2024, S&P Global Ratings had 22 ratings on public universities outside of the U.S.: nine on institutions in Canada, five each in Australia and the U.K., and three in Mexico. Ratings remain concentrated in the high investment-grade categories, with just above half in the 'AA' category. The three rated Mexican universities are non-investment-grade and the issuer credit ratings are on a national scale. The generally high ratings incorporate our expectation that the universities have the capacity to withstand some degree of market volatility, although in 2024 we lowered the ratings on two universities: La Trobe University, in Australia, to 'A+' from 'AA-' due to a rising debt burden and debt service costs, and the University of British Columbia to 'AA-' from 'AA' following a similar action on its supporting government, the Province of British Columbia.

The outlooks on rated non-U.S. universities are predominantly stable, with two universities having positive outlooks and only one carrying a negative outlook.

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Related Research

• U.S. Not-For-Profit Higher Education Outlook 2025: The Credit Quality Divide Widens, Dec. 5, 2024
• Australia, Canada, Mexico, And U.K. Public University Fiscal 2023 Medians: Credit Stability Holds But Cracks Are Beginning To Appear, Nov. 12, 2024
• The Autumn Budget Kicks Off A Funding Regime Revision For U.K. Public Sector Entities, Nov. 5, 2024
• Your Three Minutes In Canadian Higher Education: Federal Restrictions On International Student Visas Will Stem Revenue Growth, June 17, 2024
• Australian Universities: Would International Student Caps Spur A Course Correction?, June 11, 2024
• Your Three Minutes In The U.K. University Sector: Immigration Restrictions Dent Universities' Finances, May 21, 2024