OREANDA-NEWS. Fitch Ratings has affirmed three UK-based Oxford University Colleges' Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'AA' and Short-Term Foreign Currency IDRs at 'F1+'. The Outlooks on the Long-Term IDRs are Negative. The three colleges are Lincoln College, Somerville College and St Peter's College.

KEY RATING DRIVERS

The affirmation reflects the importance of the university system in the UK establishment, high international recognition, strong student demand, strong endowment funding, and limited debt. The University of Oxford was voted top of the Times Higher Education World Ranking for 2016/17. The University has been in existence for more than 800 years as a federal system of Colleges.

Fitch applies its Revenue Supported Rating criteria to rate the colleges on a standalone basis but factors in the implicit support the Colleges receive from being part of the Collegiate System. Oxford University is made up of the informal and formal arrangement of the university and its 38 colleges (including Lincoln, Somerville and St Peters), which are bound into an interdependent system of autonomous or quasi-autonomous parts.

In total Oxford University has over 22,000 students, of which 41% are foreign students and 63% of all graduate students are from outside the UK, as are 19% of all undergraduates. Aggregate revenue for the 38 colleges were just under GBP435m in 2015 and total aggregate endowment was just under GBP3.87bn.

The size of each college in terms of student numbers averages about 500 students. The colleges receive on average 5x more applications than available places in any one year. Total incoming resources for the three Colleges averaged GBP12m in FY15 with endowments averaging GBP64m (of which an average of GBP15m was unrestricted). Debt for the three Colleges averaged GBP11m.

Fitch expects the colleges' tighter control of expenditure and active fundraising to help improve profitability. Nevertheless expenditure is fairly rigid, in particular due to one-on-one teaching offered by the colleges. The colleges generally have low current margins, but this is due to their status as not-for-profit organisations, and any shortfall is covered by endowment investment returns. This generally tends to be a maximum of 3%-4% of the value of the relevant investment, which is drawn down as income. Nevertheless, this is in the context of endowment funds total returns having been up to 28% in recent years.

The Higher Education Funding Council for England provides indirect public support to the colleges. Public funds have averaged 10%-15% of income over the past five years, but we expect this to decline. Total recurrent grants to the University of Oxford have reduced by GBP24m or 13% between 2011/12 and 2016/17. Reductions in teaching funding have not been fully compensated for by the increase in 2012 of university tuition fees from the UK/EU, which rose by nearly 3x to GBP9,000. The possibility of further reductions in teaching grants not compensated by a further rise in fees will be monitored as continued government support will be crucial for the sector's health.

In the past few years, the three colleges have taken on debt to part fund their capital expenditure but this is still well within the college's debt-paying capacities and will not put the ratings under pressure.

In terms of consequences of the Brexit vote, this may lead to lower research grants from EU funds and may hinder recruitment and retention of academic talent, creating difficulties in collaborating with EU countries on international research development. Reduction in numbers of EU students applying to UK universities would affect revenues and may result in pressure on ratings, being partly mitigated by demand from non-EU countries. Nevertheless, the high demand for Oxford University and colleges should compensate for any negative impact and should not affect their ratings.

RATING SENSITIVITIES

Significant adverse changes to the Colleges' strong student demand, strong endowment funding, and debt would lead to a downgrade of the ratings. Additionally, any change to the implicit support, link and financial support between the colleges and the University would lead to a downgrade of the entities.

Any rating action on the UK's sovereign rating would be mirrored by rating actions on the three colleges as the ratings are capped.

KEY ASSUMPTIONS

No significant changes to student demand in the near future as a result of the Brexit vote as any potential reduction in EU students should be compensated by demand from foreign students.