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Rating Action:

Moody's assigns Aa3 Rating to University of Leeds' GBP50 million bond tap

23 Jul 2020

London, 23 July 2020 -- Moody's Investors Service, ("Moody's") has today assigned a Aa3 rating to the GBP50 million tap issuance by the University of Leeds ("Leeds") of their existing GBP250 million 3.125% senior unsecured bonds due in 2050.

RATINGS RATIONALE

The Aa3 rating assigned to the bond tap of GBP50 million reflects Leeds' Aa3 issuer rating with a negative outlook. Proceeds will be used to ensure the university maintains a continued buffer on liquidity, in line with its internal treasury policies.

The Aa3 issuer rating assigned to Leeds and its Baseline Credit Assessment (BCA) of a1 reflect its strong market position as a large research-intensive university, solid financial performance in recent years and positive enrolment trends prior to the coronavirus pandemic. The rating also incorporates our view that despite challenges posed by coronavirus, the university will remain resilient over the medium term because of its strong profitability and manageable debt. The rating also incorporates the strong regulatory framework in the English higher education sector, as governed by the Office for Students (OfS).

Similar to its rated peers, Leeds is exposed to lower student demand because of coronavirus. Following student application submissions in July, current indicators for domestic and EU enrolment remain strong relative to pre-coronavirus forecasts and deferrals are in line with previous years. While acceptances from international (non-EU) undergraduate students are up 16% and international postgraduate acceptances are comparable to last year, Leeds does not expect enrolment of all these students to materialise given the current public health and travel risks. As a result, the university is planning for a significant reduction in international enrolments for the 2020/21 academic year.

Despite the adverse impact on international student demand for the next year, we expect a recovery in demand over the medium term given the university's strong market position. Leeds' reputation as a research-intensive university should continue to support student demand and positions the university to benefit from recently announced higher government research funding.

The negative outlook on the rating reflects our view that policy uncertainty, especially on tuition fees, is exacerbated by weaker institutional strength of the UK and that income may be adversely impacted in an environment of low economic growth. Universities have limited expenditure flexibility to mitigate the financial impact of lower income.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS FOR UNIVERSITY OF LEEDS

Environmental considerations are not material to Leeds' credit profile.

Social risks are material to rated universities' credit profiles. The most significant of these risks are demographics, socially-driven government policy and labour relations risks. Universities are also exposed to changing student expectations around campus and academic offering which drive borrowing and investment decisions. We view the coronavirus outbreak as a social risk under our ESG framework given the substantial implications of the government lockdown on Leeds' operations and the potential impact on enrolment.

Governance considerations are material to rated universities' credit profiles. Effective execution of strategy is assessed as part of the Strategic Positioning factor in the scorecard. In addition, UK universities benefit from the regulatory framework governing the sector under the Office for Students, which monitors financial viability.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Any change to University of Leeds' issuer rating would result in a corresponding change to the debt rating of the bond.

An upgrade is unlikely given the negative outlook on Leeds' rating. One or a combination of the following trends would stablise the issuer rating: (1) further strengthening in Leeds' market position, as reflected in enrolment trends or receiving significantly more research grant revenues and growing its endowments, (2) improving operating cash flow margins, (3) a material reduction in debt levels and/or (4) an improvement in the university's liquidity position, beyond the levels currently projected. A strengthening of government oversight of the higher education sector, or an upgrade of the UK sovereign rating would also exert positive pressure on the ratings.

Factors that could lead to a downward pressure on the rating include one or a combination of the following trends: (1) a sustained reduction in student enrolment, most notably an erosion of international recruitment, (2) a failure to successfully conclude its significant capital plan and (3) erosion of operating cash flow margins compared to forecasts. In addition, a dilution of government oversight, support or a reduction in funding for the sector, or a downgrade of the UK sovereign rating would exert negative pressure on the ratings.

The methodologies used in this rating were Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edward Demetry
Analyst
Sub-Sovereign Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD-Sovereign/Sub Sovereign
Sub-Sovereign Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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