
Clouded issuance prospects for Australian universities
The university sector has become a political football in Australia, creating an uncertain operating environment especially when it comes to forecasting growth. Sources suggest the sector is well-equipped to manage the impact on revenue even the more deleterious policies could have, with little impact on credit quality. But there is a question mark over capex and thus capital market activity in the medium term.
Joanna Tipler Staff Writer KANGANEWS
Though only contributing a small proportion of the overall Australian dollar corporate bond market, universities have provided a consistent stream of domestic supply over the past decade (see chart). The sector is also a useful source of diversity, as 12 universities have issued since 2014.
The higher education sector also offers a niche product with an unusual credit profile: single-, double- or triple-A rated credit, sometimes in green, social and sustainability labelled format. These deals typically attract a specific set of investors and somewhat narrower books than more mainstream corporate credit, intermediaries say.
Despite this support – and a newly vibrant Australian dollar corporate market – the university sector has gone quiet in capital markets. La Trobe University was the last to access the public market when it priced an inaugural A$175 million (US$116.8 million) green bond in July 2023.
This marks a change from the period from 2017 to 2022. This is because many universities were investing in response to growth of, in particular, international student numbers. “There was a wave of capex as some universities sought to upgrade outdated lecture halls and student accommodation,” explains Martin Foo, Melbourne-based director, sovereign and international public finance ratings at S&P Global Ratings.
POLITICAL CURRENTS

Expansion plans have run into a political roadblock, however. The best known is federal government plans to cap international student enrolments for Australian universities, announced in May 2024. This comes as part of what Foo describes as a “big swing in international political sentiment against migration” and in particular a backlash against the very strong levels of international migration since the end of pandemic-era border closures.
While the debate in Australia is focused on immigration’s impact on the national housing crisis, Foo points out that policies similar to those proposed in Australia have already been implemented in Canada. “Our sense is that this is not a short-term blip – it is probably going to last a couple of years at least,” he says.
In the end, the initial student cap proposal did not pass Parliament thanks in large part to the efforts of the federal opposition. This came as a surprise to rating agencies, which had anticipated that the bill would pass on the basis that both sides of politics are in favour of curbing migration by targeting international students. But this development is of little comfort to the universities: on 19 December, a new “ministerial direction” came into effect that will prioritise student visa processing based on the previously proposed cap numbers.
Student visas had been prioritised based on December 2023’s ministerial direction 107 – which prioritises processing visa caseloads based on the assumed risk level of education providers and the student’s country of citizenship. The direction was itself the subject of opprobrium in the sector due to a perception that it preferences some institutions over others.
But the new ministerial direction 111 – which does not require parliamentary approval – seems likely to function as a cap in all but name. While the government is required by law to process all visa applications, deprioritising those attached to university places above a per-institution cap is expected by sector experts to achieve the same ends as a legislated cap.
The outcome is not a surprise, at least. Even before the publication of the new direction, Laurie Zanella, treasurer at University of Sydney, told KangaNews: “We still think there will be an international student cap because the opposition is likely to be even harder on migration than the current government.”
S&P Global Ratings’ report Australian Universities: Collapse of Student Caps Bill Offers Little Respite, published on 9 December, anticipated that the Australian government will seek another way to curb the flow of international university students.
Mark Smith, Melbourne-based chief operating officer at La Trobe University, tells KangaNews the failure of the initial cap bill to pass only increased uncertainty for the sector. With a question mark over growth and investment opportunities, confidence to return to capital markets has taken a significant blow.
Robin Payne, vice-president, finance and resources at Macquarie University in Sydney, believes the uncertainty surrounding policy settings is the biggest issue for the higher education sector in Australia – actually causing more harm than whatever policy settings might be implemented. “We expected to be able to grow our international student numbers, maybe not at the same pace as we had been pre-pandemic but certainly a lot faster than we now can,” Payne says.
According to Foo, ministerial direction 107 slowed down visa processing for second-tier, regional and rural universities in 2024, leading some international student counts to come in “a fair bit under budget”. He says a lot of the damage to the university sector has therefore already occurred throughout 2024.
There is also the Australian Universities Accord, published in February 2024. This document stems from government belief that Australia’s economy will not have the knowledge, skills and research it needs to prosper if the higher education system continues on its current path.
The document includes a raft of recommendations and reforms for the sector. It makes clear that one goal is to produce a greater number of graduates with the necessary skills to meet the needs of the economy – for instance by filling job and skill shortages in education, healthcare and infrastructure.
It also calls for a new funding model to meet the growth aspirations laid out, noting: “An overarching aim of the new funding model is to increase the total number of students in the system to more than 1.8 million by 2050.”
These changes will require significant investment in the higher education sector, from the government and educational institutions themselves. Manning says the targets articulated in the accord cannot be achieved unless the universities are financially robust and have a very clear operating environment through which they can work. While arguing that the accord has positive and negative connotations, he suggests the environment is currently unclear, partly due to the international cap debate.
MIXED IMPACT
Uncertainty about international student intake clearly has a major impact on university revenue projections. The February 2024 accord, states that Australian higher education providers enrolled almost 450,000 international feepaying students – more than one-quarter of total enrolments – in 2022. International student fees contributed more than one-fifth of overall university revenue.
The precise impact would vary by institution. For example, the University of Sydney expected international student caps to entail a loss of revenue of roughly A$1 billion over the next five years – a level the university believes to be manageable in the context of its A$4 billion annual revenue. It expects to comfortably absorb A$100 million of revenue loss in 2025.
Meanwhile, Smith reveals that the decline in international student numbers at La Trobe University meant a revenue drop of about A$50 million in 2024. The university had actually accepted the implementation of a legislated cap on international students in the belief that it would serve as a redistribution mechanism, restoring numbers to around 20 per cent of total enrolments.
Smith explains that the methodology the immigration department used for approval of visas under ministerial direction 107 meant that some of the larger universities were able to go “over and above” a proportional allocation of international student enrolments. He believes this created winners and losers among the universities when it comes to international enrolment.
For others, the financial impact could be more severe. Foo reveals foreign students account for 30-40 per cent of total revenue at some universities. “If this revenue stream is crimped, we will see some operating margins compress or turn negative in the absence of corresponding job cuts or other meaningful savings,” he comments.
FLEXIBLE MODELS
On the other hand, universities and sector analysts are quick to point out that the risk is primarily to growth opportunities and that higher education credit remains robust. Manning points out that the sector brushed aside concern about operational inflexibility prior to the pandemic by demonstrating when required that it can be agile on cost.
“The university sector really adapted quickly during COVID-19,” Manning says. “It was quite nimble and very effective in working around the challenges at play. We are now comfortable saying management quality is strong across the universities generally.”
Moody’s has one university on negative outlook, which Manning says is not the product of uncertainty about international students. S&P’s view is also that the five Australian universities it rates would be able to manage the potential loss of revenue from limited international student migration, and it has a stable outlook on the sector.
“The base case is heavily predicated on the assumption that universities will respond proactively if they are faced with significant revenue losses – as they did during the pandemic and through other recent shocks,” Foo explains.
He also points out that the bigger institutions have extremely strong balance sheets. Even in the event they have to draw down some cash to get through the current period of uncertainty, doing so will still be consistent with the current credit rating thresholds S&P sets for them.
Nevertheless, the rating agencies agree that the next few years pose challenges for the sector. In this context, managing cost bases will likely be key. Manning comments: “Planning for five years of capital spend is challenging and understanding where student numbers will be in three years’ time is very difficult. Agility in cost structures, courses and product offerings that universities had started to define over the past four-and-a-half years is likely to progress further over the next 12-18 months.”
S&P’s base-case expectation is that there will be some cost cuts to offset revenue losses. Foo notes this could be by freezing head counts or, in some cases, staff reduction. Courses could be amalgamated or, in some cases, discontinued.
While there will be negative consequences in media coverage, Foo continues: “Universities still employ a lot of staff who are basically sessional or casual tutors or lecturers – these staff numbers rise and fall with student numbers. There is an inherent balancing mechanism for staff costs.”
Manning believes the biggest change on the sector’s outlook could be in the assessment of the operating environment. He tells KangaNews: “The key at the moment is maximising flexibility to effect any adjustments that may be required, particularly in managing cash reserves and investments.”
The higher-education sector also has a degree of pricing power. International students typically only pay fees one year in advance as prices are market-driven and change for each academic year. One university source suggests it is “not outside the realm of possibility” that the leading universities could increase their prices by up to 5 per cent per year and still be oversubscribed given their reputation.
While this option may not be possible for all universities, the source suggests that if one or more sector leaders take the plunge there is a good chance others will follow.
Other options universities could consider include selling down commercial assets, such as land or unused buildings. For instance, Payne says Macquarie University has some land and buildings that are not part of its main campus that it would consider selling for value. “It is about de-risking the operations until there is more clarity,” he explains.
Smith reveals La Trobe has already delayed some of its operational plans. Meanwhile, it will continue to explore other opportunities to expand its revenue base – for example by developing campuses offshore.
“It is more a timing issue than a permanent change for us,” Smith tells KangaNews. “It is about getting the confidence back that will then allow us to crack on with our plans. The business models are there – the chopping and changing is the hardest part at the moment.”
SUPPLY OUTLOOK
One thing doubts over the higher education sector’s growth outlook will almost certainly entail is eased call on capital markets by university issuers. Violetta Astor, Sydney-based associate director at National Australia Bank, says some issuers have already started dialling back capex plans, for instance.
Foo adds: “Obviously, a lot of projects tend to have multi-year construction timelines – for example, a new academic facility or lecture hall. This means any pullback cannot happen that quickly. But overall, this is one of the levers we anticipate universities will pull first when it comes to preserving cash – it is reasonably easy to pull back on capex once whatever is currently under construction is completed.”
For instance, Macquarie University is the largest university issuer of Australian dollar bonds by volume. Payne reveals that the university is finishing the capital programmes it was funding through its sustainability bonds but subsequently plans to de-lever for the next 2-3 years rather than return to capital markets.
He explains this is partly in recognition that Macquarie is relatively highly leveraged compared with other universities and that in the current environment it would not be sustainable to keep growing its debt on issue. But he adds that, in hindsight, the university is in a fortunate position as it is coming to the end of a seven-year major campus rejuvenation programme.
Payne tells KangaNews: “We managed to borrow when interest rates were historically low and we are coming out of this phase just as the uncertainty is starting to hit – it is a bit serendipitous.”
According to Manning, University of Technology Sydney and Western Sydney University have completed very large campus redevelopments or expansions in the past 2-3 years and are now very well positioned from this large envelope of capital spending. As a result, they can now switch to a focus on maintenance capex – particularly on the property side – and can be more bespoke and targeted with their capital spending on emerging risk areas such as cyber security, he explains.
Universities also have funding options beyond domestic bonds. For example, some issuers have long-dated debt in the US private placement market and others can borrow from their state governments. There are also the options of commercial bank loans and lease arrangements. Foo says a few universities are taking on “debt-like” obligations by entering into significant new leases rather than via the bond market.
Despite all this, there remain good reasons for universities to return to the Australian dollar market in time. Manning tells KangaNews: “They maintain a good level of flexibility to seek funding through bank and capital markets, which can also be used as a measure to build up reserves ahead of uncertain periods.”
Moreover, according to Foo, some of the universities S&P rates still have quite big capex ambitions and plans in the pipeline. For example, the University of Melbourne has a big upcoming development in Fishermans Bend, a city suburb. He notes these could be slowed down depending on how international student policies play out, though.
Some Australian dollar supply could come from issuers refinancing upcoming debt maturities – Australian National University and University of Sydney have 2025 maturities. However, Zanella reveals that the latter is planning to repay its 2025 bond maturity, even with the uncertainty around international student numbers.
“We are coming from an extremely strong cash-flow position having had solid financial performance and cash generation in recent years,” he explains. “Our student business went well for us during the pandemic, which means we are probably a little ahead of the curve in cash resources compared with other universities.”
Where universities find themselves in need of capital, Payne says the bond market would likely provide the most competitive seven- or 10-year debt, all else being equal.
For those that choose to return to the Australian dollar market, intermediaries say demand would be in evidence. “While the university sector is a niche market, it is one its investors would like to see return,” Astor affirms. “Investors understand the challenges faced by the sector but they want universities to return when they are ready – investors are not writing off the sector.”
Unwavering demand despite the uncertain political backdrop is linked to universities’ ability to withstand the test of time. Foo highlights: “Some of Australia’s universities are far older than most of the Australian corporates or banks. This longevity and their longstanding public names give investors confidence. If these universities can survive wars, pandemics and plagues, they can probably ride out policy changes as well.”