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Better times to follow coronavirus shock, says ratings agency

Image: Jevanto Productions, via Shutterstock

Moody’s gives upbeat prediction on university finances, mitigating previous dire warning

Universities are likely to suffer short-term financial pain as the coronavirus pandemic causes lower student numbers, but strong demand means institutions will bounce back within three years, according to the credit ratings agency Moody’s.

In an analysis of higher education finances published on 18 May, Moody’s said the pandemic would lead to “temporary budget deterioration” for universities as students stayed at home and income from tuition fees fell.

But it offered universities a more upbeat assessment of how the pandemic would affect their finances than it gave on 8 April, when it warned of “balance sheet erosion” and the need for significant cost-cutting measures. 

After modelling three different scenarios, Moody’s now finds that universities “will lose income and some will incur operating deficits for the year” in each scenario. But the agency says strong balance sheets at universities “support their ability to absorb a one-off deficit”, while strong demand for higher education and a growing pool of 18-year-olds mean universities will recover within two to three years.

A significant drop in international student recruitment for next year is widely expected, meaning universities will suffer losses from tuition fees. Income from catering, conferencing and student accommodation will also fall, leaving some institutions predicting losses of around £2.6 billion.

But Moody’s said the drop in international students would be “generally manageable” as they only account for around 14 per cent of students. Fee income from domestic students “accounts for the largest single revenue source for universities” at 26 per cent of income, the agency said. “Universities with a high proportion of income from domestic undergraduate students and weaker market positions are the most exposed to lower domestic demand,” it said.

The analysis says that “in the most likely downside scenarios, the majority of rated universities would retain” a positive cash-flow margin but only the Universities of Oxford and Cambridge would maintain an AAA credit rating.

While a recent UCAS survey found that 86 per cent of students had not changed their plans for September, “students may consider online teaching to be less attractive, and either defer enrolment to the following year or expect to pay lower tuition fees”, which would in turn have a negative impact on incomes in 2021.

“We note that universities are not currently offering tuition fee refunds or discounts to students for the transition to online teaching and assessment, but momentum may build from students expecting compensation,” Moody’s wrote.

It recommended that universities should offer a “flexible recruitment cycle” to help combat falls in demand, and it pointed to the recent ‘bailout’ package as evidence that the government would “continue to support the sector”.

“While it is currently unclear how the UK’s economic contraction will affect planned increases in research and development investment, we expect policy to continue to be supportive overall,” the agency wrote.