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.