• We expect that the U.K. higher education sector's financial headroom will tighten primarily because of weaker demand from international students.
• In our view, a further marked decrease in enrolments compared with current forecasts could result in a weaker credit quality for almost half of the U.K. not-for-profit universities in our portfolio.
• While the average creditworthiness of the portfolio would remain at the current 'A' level, we would see credit quality spreading toward lower levels of the 'A' category and the 'BBB' category.
• We think that universities with lower rankings will likely experience more adverse effects. This reflects the increased competition for both domestic and international students.

There is weaker demand from international students to attend U.K. higher education institutions. This is amid tighter immigration policies, geopolitical tensions, and weakening global economic conditions--particularly in emerging countries. U.K. universities are more reliant on income from international students, increasing to about 23% of U.K. universities' total income in 2023-2024, more than double that in 2009-2010.

In addition, tuition fees for international students are not regulated, while those for undergraduate domestic students have been largely capped since 2017. U.K. universities are therefore using international tuition fees to subsidize the cost of educating domestic students. Although recruiting international students attracts talent to the country and diversifies student bodies, it also makes the sector's performance vulnerable to external factors and, therefore, volatile. Several institutions have experienced this volatility over the past couple of years, with a drop in overseas student demand.

Effect on higher- and lower-ranking universities

In our view, U.K. universities that have a sound brand name and possess top global and domestic rankings would be better positioned in case of a further decline in overseas enrolment as they typically have stronger financial flexibility. We consider universities that belong to the Russell Group, a prestigious group of universities with a strong focus on research and high positions in global rankings, to be more resilient.

We think that lower-tier universities would be more affected if overseas enrolment declined further, regardless of the extent of their reliance on income from overseas students. Beyond the decline in overseas student numbers, we expect these universities to face a more aggressive competition on domestic students. Many of these institutions are implementing strategies to attract domestic U.K. students to partly offset the lost tuition fees from international students, students are however more likely to choose higher-ranking universities.

Furthermore, we consider that the pool of international students is mainly from emerging markets, meaning university enrolment is highly exposed to changing political sentiment and economic instability. Additionally, lower-ranked universities tend to attract more students from low-income countries in Africa and South Asia, where demand is even more volatile.

Cost measures and challenges persist in the medium term

While many universities implement cost measures--such as cutting staff numbers, redesigning their offering, and lowering capital expenditures--the degree these measures can offset the decline in income from tuition fees varies significantly. We expect that these strategies will continue but we think that in the long term they could damage institutions' attractiveness and tighten universities' financial flexibility. It could also result in institutions redesigning their operating models.

We think that these issues would persist in the medium term and have tested our portfolio under a sensitivity scenario to understand its resilience. Our sensitivity scenario focuses on the more pronounced, rather than forecast, decline in fees from international students, which could structurally weaken the universities' financial standing.

Our assumptions include:

• A 15% haircut to our base-case scenario on international student fees for universities in our portfolio that belong to the Russell Group and a 30% haircut for the remaining ones, for fiscal years 2026 and 2027 (ending July 31).
• Universities will rely on existing liquidity reserves rather than drawing additional debt. This is because we have observed a debt-averse policy, especially at a time of high interest rates.

Our analysis is limited to the trajectory of the overall fees from international students and does not differentiate between fees from undergraduate compared with postgraduate students. However, we think that universities that are more exposed to postgraduate students will be affected more quickly than others given the shorter enrolment period.

Credit quality is set to diverge, although the average would remain at 'A'

Our portfolio's average creditworthiness is 'A', reflecting a wide range from a high 'AA' to a 'BBB-'. We consider that those in the lower end typically have structural, financial, and management weaknesses, and tight covenant compliance positions. We see this in their need to negotiate for lender agreements on covenant relaxation, changes, or waivers.

Under our sensitivity analysis, a weaker overseas enrolment than forecast could lower the credit quality for nine out of the 20 universities in our portfolio. This could result in a migration toward the lower levels of the 'A' category, and further assessments slipping into the 'BBB' category.

Chart 1

Our issuer credit ratings incorporate our view of each university's intrinsic credit quality, and the likelihood of timely extraordinary support by their related governments in case of financial distress. We assess the likelihood of extraordinary support across all universities operating in the U.K. as moderately high.

Under our scenario analysis, we expect operating margins and liquidity positions would weaken significantly

The key indicators affected under our sensitivity testing are:

• The universities' financial performance, as operating margins turn into deep deficits; and
• Their liquid resources, as weaker cash flow generation will result in cash and investment levels reducing quickly.

Chart 2

Chart 3

Universities' operating margins will recover in our base case

This is because of management teams' mitigating actions and their effect. Our scenario testing, however, does not consider additional actions that could be implemented to counteract the decline in tuition fees income.

Lower-ranked universities are more exposed to students from countries with more volatile economic fundamentals

While fees from international students have supported universities' financials, we think that relying on these fees heavily increases the risk of revenue volatility. This is because a large share of international students come from emerging markets, where demand can shift quickly. For example, in 2024, enrolments from Nigeria and India sharply reduced by about a 36% and 15% respectively, while enrolments from China only declined by 4%.

The share of fees from international students varies across the 20 universities in our portfolio, and in 2024 averaged about 40% of total income. Universities in our portfolio that belong to the Russell Group have the largest exposures to students from China. While the reduced demand has not affected these universities' financials as much, they have still experienced lower student enrolments. This is primarily driven by lower demand from China, due to economic developments, domestic employers having tighter requirements to target graduates from at least the top 100 universities, and domestic institutions improving their reputation and rankings. For non-Russell Group universities, the exposure is greater in India and Nigeria, adding to revenue volatility.

Chart 4