Fitch Affirms Lincoln, Somerville & St Peter's Colleges at 'AA '; Outlooks Stable
KEY RATING DRIVERS
The affirmations of the college ratings reflect Fitch's unchanged assessment of Oxford University as "an institution" and the colleges' position within it. The solvency of the institution is strongly backed by the UK government (AA+/Stable). 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. The ratings also reflect enduring student demand, the colleges' academic excellence and growth in endowment, but also their operating deficits and expenditure rigidity.
Oxford University's outstanding worldwide reputation and attractiveness ensures that student demand remains high. The colleges receive on average 5x more applications than available places in any one year. Although the size of each college in terms of student numbers and revenues is modest, the colleges enjoy a close relationship with the Oxford University institution, which Fitch factors into the ratings. In total Oxford University has over 22,000 students, aggregate revenue for the 38 colleges were close to GBP415m in 2014 and total aggregate endowment was over GBP3.5bn.
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. Total endowment for the colleges ranges between GBP400m for the wealthier colleges and GBP7m for the smaller colleges and total returns have been as high as 28% in recent years.
The Higher Education Funding Council for England (HEFCE) provides indirect public support to the colleges. Public funds have averaged 10-15% of income over the last five years, but we expect this to decline. Spending cuts 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. There is some uncertainty prior to the autumn budget statement on 25 November, as continued government support will be crucial for the health of the sector.
In the past few years, the three colleges have taken on debt to part fund their capital expenditure but this is still below the level of their unrestricted funds. Projected borrowings are modest and well within the college's debt-paying capacities and will not put the ratings under pressure.
Adverse changes to Fitch's view of the credit profile of Oxford University as an institution, or the link between the colleges and the institution would lead to a downgrade of the entities. In addition, a downgrade of the UK's sovereign rating would also lead to a downgrade of the three colleges.
No changes to the informal and formal arrangement of the university bound into the interdependent system of autonomous or quasi-autonomous parts. No significant changes to student demand in the near future.