Global Not-For-Profit Higher Education 2019 SectorOutlook: Credit Pressures ProliferateJanuary 24, 2019

The Outlook Remains Negative For U.S. Institutions

S&P Global Ratings' outlook for the U.S. not-for-profit higher education sector in 2019 is negative.Supporting the negative outlook is rating performance over 2018 that showed a significantlyhigher level of downgrades (20) and ratings placed on negative outlook than upgrades (three)versus prior years. While the sector continues to face many of the same issues that havechallenged it for the past few years, we believe that schools' sustained revenue pressures andgrowing expenses, combined with decreased opportunities in the capital markets, will result in anegative operating and credit environment in 2019.

Students' continued expectations of increased college affordability and lower tuition and debt atthe same time they demand enhanced facilities, services, and general college experience have leftmany institutions at a difficult operational crossroads. Institutions continue to struggle tocommunicate their value proposition to potential students and parents, while balancing anincreasing financial aid burden as competition for students drives tuition discount rates higher.Amid these operating pressures, institutions are challenged by continued competition for ashrinking pool of students, as many are faced with weakening demographics and internationalstudent enrollment declines. The credit quality split between higher-rated institutions and thosein the 'BBB' category and below continues to manifest itself with more downgrades and negativeoutlook revisions to lower-rated institutions, which often lack the size and scale, reputation,revenue diversity or balance sheet to compete as effectively as higher rated organizations.Consequently, we think that institutions with limited flexibility -- whether that be in programming,financial operations, enrollment, resources, or student draw -- could face additional stress fromthese challenges.

Our outlook includes more risks than opportunities, illustrating its negativity. In addition, themagnitude of the economic risks and potential disruptors outweigh the strength of theopportunities. Should some of the broader uncertainties happen (such as an increase in negativetrends for the national economy), endowment returns, fundraising efforts (or both) coulddecelerate, and states could face more credit stress, which could affect funding for publicinstitutions.

Global Not-For-Profit Higher Education 2019 SectorOutlook: Credit Pressures ProliferateJanuary 24, 2019

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Risks Opportunities

- Demographics and international enrollmenttrends cause pressure

- Increasing tuition discount rates and declining nettuition revenue

- Heightened importance of enterprise riskmanagement

- Slower economic growth could hurt state fundingfor public institutions

- Constrained capital market activity and tax reformissues will continue

- Innovative strategies and partnerships flourish

- Fundraising efforts remain robust

- More deliberate growth strategies

Overview Of U.S. Sector Ratings

As of Dec. 31, 2018, S&P Global Ratings has 430 public ratings on U.S. private and public collegesand universities, which are secured by a general obligation, or the equivalent. Our U.S. highereducation ratings range from 'AAA' to 'B-'. We have only three issuers rated at or below 'B+'.Approximately 42% of our overall ratings are in the 'A' rating category, and 29% are rated 'BBB+'or below (see chart 1). Approximately 7% of our rated universe is in the speculative grade category– this compares to a much smaller percentage of institutions rated non-investment grade a fewyears ago. The lower investment grade rating category (BBB- and below) and non-investmentgrade categories have grown over the past few years as institutions have been challenged byincreasing enrollment and operating pressures.

Chart 1

While 90% of U.S. higher education ratings currently carry a stable outlook, negative outlooks (25)outpace positive ones (17; see chart 2) by 1.5 times, highlighting the pressures facing individualschools within the sector. In our opinion this ratio would be higher, but the number of downgradesin 2018 compared to upgrades was significant as many outlook revisions were resolved (6.7 times;see chart 3).

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

Chart 2

Chart 3

Colleges and universities on negative outlook continue to outpace those with a positive outlook,and this ratio weakened notably during 2018. However, we did affirm 89% of college and universityratings overall in 2018 (see chart 4). While schools continue to face financial pressures, many havebeen focused on cost containment and freezing open positions – the "low hanging fruit" of theirexpense base. We expect many institutions will continue to focus on cost reduction during ouroutlook period, as pressures continue.

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

Chart 4

In 2018, we lowered 20 ratings and raised only three (see chart 4). At the end of the year, 25 ratingswere on negative outlook, and 17 on positive. As 2019 progresses and we continue to review ourhigher education ratings, we believe that continued sector-wide challenges will result in morenegative rating actions than positive rating actions.

Demographics And International Enrollment Trends Cause Pressure

Increasing competition for students has been amplified in certain states due to changingdemographics, and one of the more significant issues affecting colleges and universities in certainparts of the country is the declining number of high school graduates, which is expected tocontinue to vary greatly by region and state. We have already seen significant declines in theNortheast and Midwest, which are projected to stabilize a bit over time, but not to increase. Thesedeclines have had a notable negative impact on many regional public institutions whose studentenrollment is primarily in-state, as well as private institutions with more regional student bodies.While most of these schools continue to recruit outside their states and work to expand theirreach through revamped brand and marketing strategies to offset these declines, this is a seriouspressure point that we expect will continue to challenge countlessinstitutions in 2019. Contrary tothese areas, in the South and the West we have seen substantial enrollment growth in states suchas Texas. We anticipate this positive trend will also continue.

Recruitment out of state has been an important strategy for schools for some time, and for many,this has long included international students. International students are increasingly important tocolleges and universities. In addition to global cultures and perspectives, international studentsalso bring much-needed revenues to schools and their communities. Yet, despite the strongincrease in international enrollment at schools in the U.S. during the past 10 years, the number ofnew international students dropped for the first time in recent years in fall 2016, followed by a 7%decline in fall 2017. While a clear picture of fall 2018 international trends is not available yet, wehave seen preliminary results which vary based on institutional characteristics. Drops in newinternational students have been attributed to a combination of factors including visa delays anddenials, the shifting social and political climate, the rising costs of U.S. higher education (the mostexpensive in the world), and competition from institutions in other countries, such as Australia.

Internationalstudents bringmuch-neededrevenues to schools.

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Enrollment is a key credit factor in our analysis, and any material declines can affect financialoperations and could affect credit ratings.

To date, we have not downgraded any schools solely because of international enrollment declines,but a consistent reduction in this student group could become a pressure point for schools whichhave come to rely on a significant number of students from overseas. At the same time, we areseeing universities change their approach with respect to international students; many more arenow partnering with foreign governments and universities to offer collaborative degree programs.In the long term, these efforts may help the credit profile of a university by increasing revenuediversity and also expanding its educational reach.

Increasing Tuition Discount Rates, Declining Net Tuition Revenues

Tuition for all types of schools continues to rise, exacerbating public concerns about collegeaffordability and student debt (which has reached $1.5 trillion). Students and parents seekstagnation in or decreases to the cost of attendance while demanding even more improvements tofacilities, amenities, and services. As the disparity between student expectations and willingnessto pay grows, we believe financial operations and ability to achieve enrollment goals will becomeincreasingly difficult for many colleges and universities, and the institutions that succeed will bethose able to reframe the conversation and best articulate their value proposition to potentialstudents and parents.

Confronted with increasing competition for students, which in some cases is compounded furtherby demographic pressures or international enrollment declines, universities continue to raise theirtuition discount rate (or, institutional financial aid). The National Association of College andUniversity Business Officers' (NACUBO) published data (see chart 5) on this metric depicts anapproximately 10 basis point increase in the average discount rate over the past 10 years, and anaverage freshmen discount rate of 50% for fall 18. We have actually seen many private institutionsdiscounting freshman tuition at more than 70% this year. While this is good news for students andtheir families, it also means that tuition revenue at these schools remains very constrained. Evenfor schools with a significant endowment, these financial aid increases are not a sustainabletrend, in our opinion. Net tuition revenue (NTR, or gross tuition minus institutional financial aid)makes up the most substantial portion of the majority of college and university budgets, andduring the past few years we have seen declining NTR throughout our rated universe, indicative ofthe pressures on the sector.

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

Chart 5

Within our rated universe, a growing number of schools are generating negative NTR – to over 30%of them fiscal 2017, from 20% in fiscal 2013 (see chart 6). Within only our rated privateuniversities, this percentage and trend is more pronounced. Smaller schools (less than 1,400 FTE)are facing more significant enrollment declines and having a more difficult time managing theirtuition discount strategy than larger schools: the percentage of small, private schoolsexperiencing three consecutive years of NTR declines is more than triple that of larger schools. Wehave seen institutions employing a variety of strategies to increase net tuition revenue – includingrecruitment strategies, retention strategies, and financial aid strategies. Initial indications fromfiscal 2018 audits show continued deterioration of NTR throughout the sector, although there arealso pockets of positive growth. We expect this to continue.

We have seendeclining net tuitionrevenue throughoutour rated universe.

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

Chart 6

Slower Economic Growth Could Hurt State Funding For PublicInstitutions

After the recession hit in 2008, most states cut student funding and colleges and universities havebeen slow to feel the effects of economic recovery - but positive economic trends in recent yearshave translated, in most cases, into very modest increases in state operating appropriations.However, for the most part, state funding remains below pre-recession levels. For 2019, we expectstate funding will be flat to increasing for most states, but an economic slowdown could havematerial impacts beyond our outlook.

S&P Global Ratings' economists think the current economic cycle is either in, or fast-approaching,its latter stages. According to our recent economic forecasts, higher interest rates from theFederal Reserve will likely weigh on GDP growth next year. (For more on our 2019 economicprojections, see "The New Year Will Likely Ring In A Record U.S. Expansion; Could It Be A LastHurrah?," published Dec. 4, 2018.) S&P Global Ratings views the chance of a recession over thenext 12 months to be 15%-20%, up from 10%-15% earlier last year, and history shows that,should states squeeze their budgets in 2019 or 2020, reductions to state revenues for highereducation will likely follow. The impacts from slower economic growth could vary greatly by state,but for some it could mean material reductions in state operating appropriations. While themajority of public universities rely on net tuition revenue for a greater percentage of their overallbudget than state funds, these state appropriations still make up a considerable portion ofschools' operating budgets, and strain on these resources can have major negative impacts. At thesame time, we anticipate other revenue streams, such as research grant funding, will remain flatto increasing in 2019.

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Chart 7

Heightened Importance Of Enterprise Risk Management

As risks to higher education institutions arise from less traditional areas – scandals, lawsuits,cybersecurity breaches – we believe management and governance need to identify key risks anddevelop risk mitigation strategies. This process is generally known as implementing an enterpriserisk management (ERM) program and an increasing number of colleges and universities aredevoting greater resources for such programs. The need for such investment is dictated, in part, byrapidly moving news cycles and heightened public scrutiny as college and university officialsrespond to a variety of issues including campus safety and sexual assault cases, race relations,free speech, or socially responsible investing to name a few.

Reputation risk is a growing concern in an increasingly politicized public climate with decreasedtolerance for opaque transparency and untimely rectification of problems when they arise. Moreschools face material disruption -- from widespread negative press or resignation/firing of keyindividuals, to loss of fundraising or enrollment if the issue persists long enough. Headline riskspecifically related to management and governance in higher education was prevalent in 2018,and in each case, we assessed whether there was an impact to credit quality. We continue tomonitor developments for signs of disruption and credit stress. Increasing public scrutiny ofgovernance and management at colleges and universities has led to calls for various reforms inpolicies and practices, greater transparency, and increased accountability. For more informationon how we incorporate governance factors into our analysis, see "Through The ESG Lens: HowEnvironmental, Social, And Governance Factors Are Incorporated Into U.S. Public FinanceRatings," published Oct. 10, 2018.

The need forinvestment in ERM isdictated, in part, byrapidly moving newscycles.

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Constrained Capital Markets Activity And Tax Reform Issues WillContinue

In 2018, total municipal bond market activity for college and university transactions diminished byabout 50% to $8.8 billion from the $19.1 billion issued in 2017 according on Thomson Reutersdata. Following the federal tax reform, advanced refunding deals are no longer an option and thishad a material impact on 2018 issuance, pulling advance refundings planned for 2018 into the lastquarter of 2017. In our opinion, should interest rates rise in 2019 as expected, refundingopportunities will correspondingly decline, and we expect that overall issuance will remainconstrained.

Higher education institutions continue to assess some of the tax reform provisions. Among otherprovisions, the bill enacted a tax on investment earnings for private colleges and universities withmore than $500,000 of assets per student (for institutions with greater than 500 students).Though the number of affected institutions is limited, we believe this tax is a risk to the sector inthat it opens the door to possible future expansion of the scope or rate of the tax, which could havea more material impact on credit quality. There is also continued uncertainty as to how taxlegislation will affect charitable giving, as well as further guidance around the excise tax on thefive highest paid individuals at tax-exempt organizations on compensation over $1 million, whichapplies to many higher education presidents, athletic coaches, and investment professionals. Thiswill strain institutions with highly paid staff subject to the tax, although it's unlikely the tax willmaterially affect credit quality.

Innovative Strategies And Partnerships Flourish

Though the sector has historically had a reputation for being slow to change, particularlycompared to the corporate sector, colleges and universities seem more open than ever to adoptingnontraditional strategies -- for example, the Purdue and Kaplan merger; the Boston University andWheelock College merger; Grand Canyon University's attempt to convert to non-profit status;Virginia Tech's innovation campus. We expect institutions will continue to creatively explore newways of doing business in the upcoming year to combat the challenges of the current operatingmodel. Brand identity within the sector continues to be important, and while other industriesmight regularly merge or make acquisitions, higher education has its own distinctions which makethese types of transactions less common. However, there have been several recent successfulmergers of note, and we anticipate that we will see more consolidation (as well as further schoolclosures, unfortunately) across the sector as operating pressure continue to exacerbate.

With regard to demand for improvements to aging buildings or new facilities on campus, P3s(public private partnerships) have been widely used and are recognized as a viable deliverymethod as colleges and universities address their infrastructure needs. Beyond housing, highereducation institutions have also utilized P3s for other traditional infrastructure, such as athleticcenters, parking garages, and dining facilities. Now, energy infrastructure is emerging as an areato for forming partnerships given several drivers, including investments needed to meetinstitutions' commitments to sustainability; the need to upgrade aging energy infrastructure atthe end of its useful life; the emergence of new energy technologies and the availability ofnew/better-suited capital in the market. These business models continue to evolve, and we expectto see more of these types of unique partnerships in 2019.

Colleges anduniversities seemmore open than everto adoptingnontraditionalstrategies.

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

Fundraising Efforts Remain Robust

With the growing student debt crisis and issues of affordability continuing to pressure the sector,philanthropy has proven an effective antidote. Overall fundraising efforts, and endowment returnsfor higher education were solid in both fiscal 2017 and fiscal 2018 for most schools, and morethan enough to offset schools' endowment draw needs. Positive economic trends and robustmarket returns (NACUBO reported average market returns of 12.2% in fiscal 2017), combined withgenerous gift-giving, had positive credit impacts for many institutions. Additionally, multiple largegifts announced last year are elevating universities to new financial heights. Recent examplesinclude transformative gifts to New York University, Columbia University, and John HopkinsUniversity. Large gifts like these can be transformative, strengthening balance sheets andlessening financial operating risk. While fundraising ability is a small sub-factor within ourcriteria, we recognize that it could also be a catalyst to improve demand and enrollment metrics,enhance a school's reputation, and affect long-term credit quality. We expect strong fundraisingto continue in 2019, but beyond our outlook period, slowing economic growth could dampenphilanthropy. Additionally, given recent market performance, we think it is likely that fiscal 2019market performance (and correspondingly, endowment returns) will be weaker than the past twoyears. For more information on these recent gifts, please see "Creative Partnerships,Transformative Gifts, And Headline Risks: The Top 10 Credit Stories Affecting U.S. Not-For-ProfitHigher Education In 2018," published Dec. 20, 2018".

Beyond our outlookperiod, slowingeconomic growthcould dampenphilanthropy.

More Deliberate Growth Strategies

Though quite a few schools are struggling to meet enrollment goals, colleges and universities stillface a nearly unlimited pool of potential students -- undergraduate, graduate, or professionalstudents; part time or full time; first generation, international, degree completion, transfers, etcetera. According to U.S. Census data, the salary gap between those with a high school degree andthose with a bachelor's degree, remains significant in almost every state, and employmentprospects for those with higher levels of education remain robust.

Institutions, now more than ever, are being deliberate in their pursuit of enrollment and revenuegrowth. Attracting and retaining tomorrow's student has never been so important – as a financialstrategy and as an enterprise strategy. We are seeing institutions pursuing a variety of strategicinitiatives to grow enrollment and, in effect, net tuition revenue. The development of new,innovative programs to boost demand and access, new products including hybrid and onlineprograms, greater technology efforts and summer preparatory programs are some examples ofthe investments schools are making in academic programming. Institutions are also devotingmaterial finances to enhanced wellness centers and student counseling focused on mentalhealth. Finally, updated recreation centers, and reconfigured residence halls, are examples ofcapital intensive initiatives colleges and universities have undertaken to achieve these goals;however, not matter how important the goal, balancing the costs with fulfilling the mission can bechallenging.

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

Long-Term Issues

Potential federal legislation

We expect to see widespread discussions around higher education policies in the coming year, asmany governor and legislative body changes occurred post-midterm elections, and quite a fewpoliticians campaigned on education. The prospect that a bill in Congress to reauthorize theHigher Education Act, which funds federal financial aid and other programs, will be considered,remains remote, given that it would need bipartisan support. But, Senator Lamar Alexander(R-Tenn.), chairman of the Health, Education, Labor and Pensions Committee and a formersecretary of education, has announced that he will not run for re-election in 2020, and the HEA iswidely considered a priority to him, so there is potential something will get done.) For 2019, theDepartment of Education is expected to receive $71.5 billion, a $581 million increase over fiscal2018. The House of Representatives also approved an appropriations package that includes a$100 increase in the maximum Pell Grant award to $6,195 and a $2 billion increase in funding forthe National Institutes of Health, up over 5% from 2018.

Pensions and other benefits could prove costly

Many public colleges and universities participate in their respective state's pension plan, andsome private universities maintain defined benefit plans. As the burden of unfunded pension andother postemployment benefit liabilities increases, the cost is passed on to instruments of thestate, including colleges and universities. Therefore, in states with low funded ratios, schools areseeing increasing required pension and other post retirement contributions. We work closely withour state analysts to assess a forward-looking view of changes in assets and liabilities, fundedratios, and funding discipline. We take a negative view, pursuant to our criteria, of low pensionplan funding ratios and a failure to cash fund actuarially determined contributions or statutorilyrequired contributions in full. As those states with low pension plan funding ratios seek to closethe funding gap we expect colleges and universities in those states to see possible rising pensionand retirement obligation costs pressuring operating margins. We will continue to evaluate eachindividual school's financial flexibility and ability to manage any additional cost burden. For amore thorough look at our views on pension and OPEB, see "S&P Global Ratings' U.S. PublicFinance 2018 Pension And OPEB Research Recap," published Dec. 13, 2018.

In states with lowfunded ratios,schools are seeingincreasing requiredpension and OPEBcontributions.

Upcoming accounting changes

Recent and proposed accounting and financial reporting standards by both the GovernmentalAccounting Standards Board and the Financial Accounting Standards Board are keeping collegeand university treasurers and other finance professionals burning the midnight oil analyzing theimpact. We are continuing to evaluate what, if any, modifications may be necessary to ourcalculations from reporting changes that we are just beginning to see in fiscal 2018 audits. As wegain more experience with the varied reporting disclosures and formats we will outline any specificchanges to our analytical assumptions or calculations that may be necessary to enhanceanalytical comparability and understanding. Our goal is always to accurately reflect the creditquality of institutions. To the extent these accounting changes provide additional insight into thecreditworthiness of colleges or universities, we might make adjustments to the way we calculatecertain ratios or numbers. However, we do not anticipate changing ratings on a wholesale basis

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purely due to an accounting change.

Cybersecurity

Colleges and universities are particularly attractive targets for hackers as they are high-visibilitytargets and possess significant amounts of data and wealth. our opinion, higher education facessubstantial cybersecurity risks. Universities not only own vast amounts of research data, but theycan also hold employment data, medical records, and other sensitive personal information. Whiledata is an attractive target for some hackers to ransom, manipulate, or disclose, for others theorganization's wealth itself is the prize. But these assets are difficult to secure, and complicatingmatters is the organizations' nature as gathering places for open exchange of ideas, both inperson and online. Colleges and universities are raising the profile of their senior technologyleadership. Chief information officers (CIO) face daunting tasks including containing, securing, andthwarting unwanted access often with limited resources at the same time schools are striving forincreased academic collaboration, inclusivity, accessibility, and relevance (these latter factorsoften compounding the CIO's challenges). However, universities can access experts and are oftenthe organizations training the next generation of network security engineers. In addition, collegesand universities have faced other outside threats for many years and already havewell-established risk management teams and practices that they can extend to cybersecurityefforts. For more information on how we view cybersecurity risk, see "For Many Muni IssuersTechnology Brings Financial Benefits, But Also Increasing Credit Risks, published Aug. 22, 2018.

Colleges anduniversities areparticularly attractivetargets for hackers.

2019 Outlook For Not-For-Profit Universities Outside The U.S.

Key Takeaways

- Australian universities are on stable outlook, reflecting solid demand, robust operating surpluses and high levelsof financial resources

- Canadian universities remain strong and stable

- Negative trend on U.K. universities due to sector-wide cost pressures, as well as increasing uncertainties aroundBrexit

- Mexican public universities will face increasing risks because of stagnated government funding

Overview Of Non-U.S. Sector Ratings

S&P Global Ratings rates 19 public colleges and universities outside the U.S. Among rated publicuniversities in Australia, Canada, Mexico, and the U.K., around 68% are in the 'AA' category, 16%are in the 'A' category, and 16% are rated non-investment-grade.

Although the majority of institutions (74%) remain stable, this proportion weakened meaningfullycompared to the last couple of years, when all institutions reported stable outlooks. Australianand Canadian institutions have remained the most solid from a credit perspective, which wereflect in their ratings with stable outlooks. However, there is a negative bias on ratings amongpublic colleges and universities outside the U.S., mostly explained by the negative outlooks onthree U.K. institutions: University of Sheffield, King's College London, and Lancaster University.We have two positive outlooks on ratings out of 19: Universidad of Nuevo Leon in Mexico andNottingham University in the U.K.

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

Chart 8

Chart 9

We believe that events such as Brexit, international students' enrollment trends, pressurescoming from pension and personnel expenditures, tuition caps, and stagnation on governmenttransfers could put increasing pressure on international universities' credit quality over the nextfew years, which would break a long period of rating stability. We also believe that appetite foradditional borrowing could increase in coming years in the face of declined government support.However, it is not likely to compromise creditworthiness, in our view.

Australian universities with stable performance over 2019

S&P Global Ratings currently rates four public universities in Australia: the Australian NationalUniversity (AA+/Stable/A-1+); the University of Melbourne (AA+/Stable/A-1+); the University of

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

New South Wales (AA+/Stable/A-1+); and the University of Wollongong (AA/Stable/A-1+). Thestable outlooks reflect our view that these universities will continue to experience solid demandfrom domestic and international students, continue to post robust operating surpluses, andmaintain relatively high levels of financial resources.

Commonwealth grants are universities' largest source of revenue. Funding under theCommonwealth Grant Scheme (CGS), which supports domestic bachelor-level courses, for 2019will remain capped at 2017 levels. After this, CGS funding is expected to grow in line with adultpopulation growth, if universities meet certain performance requirements. However, with the nextCommonwealth election due in May 2019 these funding arrangements may change. The mainopposition party plans to partially reverse the CGS freeze if elected.

We believe these changes will have minimal impact on the four rated universities. This is partlybecause they have benefitted from several years of rapid growth in full-fee paying foreignstudents, particularly from China. University College London's Centre for Global Higher Educationbelieves Australia is poised to overtake the U.K. in 2019 as the second-most popular destinationfor international students, behind only the United States. While this growth is allowing universitiesto post stronger surpluses and accumulate financial resources, we believe that it also makesthem more vulnerable to potential shifts in foreign student demand. Nevertheless, our view is thatall four universities would maintain sound financial performance if foreign demand were to ebb.

Canadian universities remain strong and stable in 2019

The eight Canadian universities that we rate are some of the top-tier institutions in the country,with generally superior market positions, strong balance sheets, and capable management teams,and we expect that the credit profiles of these institutions will remain largely stable in 2019 asthey are relatively well placed to address the challenges facing the higher education sector.

Provincial operating grants are the largest source of grant revenues for universities but as mostprovinces have grappled with fiscal deficits over much of the past decade, post-secondary fundinghas been largely flat in real terms, leading to a diminishing proportion of total revenues comingfrom government. Universities are also subject to domestic tuition caps and demographic trendsin many regions indicate a plateauing of the school-age population over the medium-term, furthersqueezing university budgets. For example, the Ontario government recently announced a plan tocut domestic tuition fees by 10%. We think that this will strain university finances, but will not initself trigger negative rating actions as we expect universities overall to retain strong financialperformance and high liquidity levels to absorb revenue fluctuations (see "Ontario's 10%Domestic Tuition Cut Ratchets Up Pressure On University Budgets," published Jan 21, 2019).

Universities have largely relied on international students, who pay unregulated tuition, to offsetthese pressures, although competition for these students will likely intensify in 2019. We believethat Canadian universities will remain an attractive destination, particularly those in more urbanareas and those offering sought after programs such as engineering, IT, business and biomedicalsciences. The Canadian economy continues to face labor shortages among skilled workers and anaging population, and the federal government has established a relatively supportive pathway toresidency and citizenship for international graduates to help address these issues. As well,international tuition at Canadian universities is typically lower than in other majorEnglish-language markets, such as the U.S., the U.K., and Australia.

The universities that we have ratings on in Canada have, on the whole, demonstrated an ability toadapt to these operating pressures and continue to grow enrolment. We believe that the need tomaintain and renew campus infrastructure will strain university budgets and could lead to somemoderate debt borrowing in 2019.

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Negative trend on English universities' creditworthiness in 2019

We expect that financial pressures will remain throughout 2019 for universities within England, asrevenues are expected to grow at a lower rate than expenditure requirements, such as forpensions and personnel. A review of tuition fees will be undertaken in 2019 and a recentaccounting reclassification from the Office for National Statistics (ONS) may result in an overhaulin the tuition fee framework. Historically, outstanding student loans that the U.K. government hadlent to students would not be recorded as a cost (government spending) until after 30 years.However, with the belief that up to 60% of student loans could go unpaid, the ONS has recentlydecided that these outstanding loans should be classed as government spending. This could forcethe U.K. government to assess the current levels of tuition fees, which without a correspondingtop-up in grants could result in lower fees and less revenue for English universities.

This year will also be plagued with uncertainty due to the ongoing negotiations surrounding theU.K.'s exit from the European Union. A disorderly Brexit could result in a scarcity of EU academicsand students but could also affect the attractiveness of the U.K. as a destination for internationalstudents. International students are English universities' most profitable source of revenue andthey have used the revenues from these students to subsidize declining government grants.Therefore any threat to this revenue stream could have a further impact on the financial profile ofEnglish universities. These financial pressures have transpired in our rated portfolio throughout2018, with three of our four publicly rated entities having their outlooks revised to negative. It isstill uncertain whether these negative outlooks will materialize into downgrades throughout 2019,but what seems clear is that uncertainty is set to remain for the next couple of years.

A disorderly Brexitcould affect theattractiveness of theU.K. as a destinationfor internationalstudents.

Mexican universities likely to deepen their structural weaknesses in 2019

We expect that Mexican public universities will face increasing risks because of stagnatedgovernment funding coupled with growing pressures to meet demand. Rated Mexican universities,much as all the country's public universities, depends greatly on government support. Over thepast five years, government transfers accounted on average for 77% of total income, of whichabout 24% and 76% comes from state and federal transfers, respectively. As the 2019 federalbudget includes no real growth for universities transfers, their ability to enhance financialmanagement policies and planning are critical to avoid further slippages in their financialperformance.

Additionally, we consider that the new federal program "Universidades de Bienestar Benito JuárezGarcía," which aims to create 100 new public universities in the country, will likely not have asignificant impact on current rated universities enterprise profile, as long as they target unfulfilleddemand on small municipalities. The new federal program aims to improve higher educationcoverage, as in Mexico the percentage of population who have attended higher education is stillsignificantly below that of other countries. In 2015, the Organization for Economic Co-operationand Development (OCDE) reported that the proportion of the Mexican population with highereducation degrees reached 16%, while the average of the OCDE countries was 36%, Canadareached 55% while the U.S. reported 45%.

In our opinion, Mexican universities also have room to improve their financial profile, mainlystrengthening both their financial management policies and own resources. Borrowings are likelyto remain stable in 2019, but a significant drop in federal transfers could push public universitiesto increase borrowings in the form of bank loans mainly to finance its infrastructure needs.

Research contributors: Adriana Artola and Sean Wiley

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This report does not constitute a rating action.

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Global Not-For-Profit Higher Education 2019 Sector Outlook: Credit Pressures Proliferate

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