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TEXT-S&P affirms University of Nottingham 'AA-' ratings
July 16, 2012 / 4:53 PM / 5 years ago

TEXT-S&P affirms University of Nottingham 'AA-' ratings

Overview
     -- We consider that the University of Nottingham has demonstrated sound 
financial performance and strong financial management, both of which have 
supported the university during a period of significant change in the sector.
     -- We are therefore affirming the 'AA-' long-term issuer credit rating on 
the University of Nottingham.
     -- The stable outlook reflects our expectation that the University of 
Nottingham will improve its operating cash flows, through the increase in 
tuition fees to GBP9,000 per year from 2013 and effective cost control, to 
mitigate the forecasted increase in debt levels.

Rating Action
On July 16, 2012, Standard & Poor's Ratings Services affirmed its 'AA-' 
long-term issuer credit rating on the U.K.-based University of Nottingham. The 
outlook is stable. 

Rationale 
The rating on the University of Nottingham reflects our view of its 
stand-alone credit profile (SACP), which we assess at 'a+'. The rating also 
reflects our opinion of a "moderately high" likelihood that the U.K. 
government (AAA/Stable/A-1+; unsolicited rating), working through the Higher 
Education Funding Council for England (HEFCE), would provide extraordinary 
support so as to avoid a cash default in the event of financial distress.

In accordance with our criteria for rating government-related entities (GREs; 
see "Rating Government-Related Entities: Methodology And Assumptions," 
published Dec. 9, 2010), our view of a "moderately high" likelihood of 
extraordinary government support is based on our assessment of the University 
of Nottingham's: 
     -- "Important" role for the U.K. government and its public policy 
mandate; and
     -- "Strong" link with the U.K. government, demonstrated by its track 
record of providing support.

The 'a+' SACP on the University of Nottingham reflects high levels of student 
demand, supported by the university's academic reputation. The university has 
continued to demonstrate sound financial performance, and we expect it to 
maintain this over the rating horizon. We consider the university's financial 
management to be strong, as demonstrated through the support provided during 
the period of significant change in the sector.

We believe that the reducing trajectory of U.K. public sector funding, 
particularly for research, will expose the university to greater competition 
for additional funding sources, such as philanthropic contributions and EU 
funds. Moreover, we note that the university's access to liquidity relies on 
committed facilities arranged with a single lender. Both factors currently 
constrain the rating, in our view. 

The University of Nottingham has a student base of about 43,000 students and 
offers a wide range of undergraduate and postgraduate programs. The student 
population is concentrated in the U.K., with about 34,000 students, and in the 
university's foreign campuses in Malaysia and China, with about 8,700 
students. The high proportion of international students based in foreign 
campuses, as well as the significant amount of overseas and EU students based 
in Nottingham, make the University of Nottingham one of the most international 
universities in the U.K. As a result, the university is exposed to different 
competitive dynamics compared with other U.K. universities. 

The University of Nottingham is a member of the Russell Group, which is an 
association of British public research universities. The university's 
multidisciplinary research approach compares well on an international basis. 
In addition, we consider that its collaboration with private businesses gives 
the university a competitive advantage, as it supports employment levels and 
boosts the university's reputation.

We believe that the University of Nottingham's reputation will continue to 
support its high level of student demand even after the university's funding 
sources change--from academic year 2012/2013, the university will charge fees 
of GBP9,000 (funded via the Student Loans Company) for home and EU 
undergraduates. Moreover, we believe that the university's size and the 
diversity of its income stream help protect it against fluctuations in subject 
popularity.

We consider that the university has a healthy financial position, supported by 
a historically improving operating cash-flow performance. We expect the 
university's 2012 operating performance to weaken somewhat compared with 2011, 
following the reduction in grants from the central government. We expect 
overall surplus levels to decrease to 4% in 2012, from 6.4% in 2011. However, 
from 2013, we expect the University of Nottingham to gradually improve its 
operating cash-flow performance, owing to the planned increase in tuition fees 
and the university's plan to control costs more efficiently. We expect overall 
surplus levels to be about 5% by 2015.

We anticipate that the University of Nottingham will use its cash-flow 
surpluses to support growing investment levels, which are expected to peak in 
financial year 2014. Total investment levels will amount to about GBP165 million
until 2015, and we expect the university to fund capital expenditure with an 
additional GBP70 million of debt. Therefore, under our base case, we expect debt
levels as a percentage of revenues to grow significantly in the medium 
term--from 2.5% in 2012 to about 13.2% in 2015. We consider this to be modest 
compared with other U.K. universities. 

Liquidity
The University of Nottingham's access to liquidity relies on committed 
facilities arranged with a single lender to meet its working capital 
requirements. This follows the university's decision to minimize costs 
associated with its cash holdings (about GBP3 million as of June 2012). 

The University of Nottingham's undrawn facilities of about GBP119.1 million in 
June 2012 cover expected annual interest payments (about GBP2.5 million in 2012 
and GBP11 million in 2013) many times. The university's facilities are held with
just one lender, the Royal Bank of Scotland PLC (A/Stable/A-1), although we 
understand that these should be transferred to Santander UK PLC (A/Stable/A-1) 
over the next few months.

We believe that both the nature of the University of Nottingham's business 
profile, based on relatively predictable cash flows, and the university's 
prudent treasury management skills, mitigate its sole reliance on external 
liquidity. This is in line with the business profile of other universities in 
the U.K., which receive a predictable revenue stream from the HEFCE grant and 
the tuition fees from the Student Loans Company. However, compared with 
international peers, we view the University of Nottingham's access to 
liquidity as less strong than that of its rated peers, particularly when 
compared globally.

Outlook
The stable outlook reflects our expectation that the University of Nottingham 
will maintain high levels of student demand and increase its operating cash 
flows, supported by the planned increase in tuition fees to GBP9,000 per year 
from 2013 and effective cost control. This should mitigate the forecasted 
moderate increase in debt levels, in our view. We also expect the university 
to successfully support research through additional funding sources, such as 
philanthropic contributions. 

We could raise the rating if the University of Nottingham is able to adapt to 
the changing competitive environment without materially increasing the risk of 
its business profile to grow its revenue stream, for example, by increasing 
its reliance on overseas students. In our upside scenario, we would also 
expect the university to improve its operating cash-flow performance, to 
support its current investment profile, and limit borrowing levels. Although 
unlikely, we could take a negative rating action if we observed a change in 
the university's prudent financial strategy, especially if this were to lead 
to an increase in its debt levels that is significantly higher than what it 
currently plans, in conjunction with a negative operating cash-flow 
performance. 

Related Criteria And Research
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 
9, 2010 
     -- Approaches To Rating U.K. Universities Amid Growing Credit Diversity, 
March 28, 2003 
Ratings List
Ratings Affirmed

Nottingham (University of)
 Issuer Credit Rating                   AA-/Stable/--      


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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