SPY381.42-5.12 -1.32%
DIA312.99-1.20 -0.38%
IXIC12,997.75-361.04 -2.70%

Fitch Affirms Universidad Autonoma de Nuevo Leon at 'BBB-'; Outlook Stable

· 02/05/2021 17:49
Fitch Affirms Universidad Autonoma de Nuevo Leon at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency)

Fitch Ratings-Mexico City-05 February 2021:

Fitch Ratings has affirmed Universidad Autonoma de Nuevo Leon's (UANL) Long-Term Local Currency Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook is Stable. The Standalone Credit Profile (SCP) has been lowered to, and constrained at, 'bbb-' from 'bbb' stemming from counterparty risk. At the same time, Fitch has affirmed the National Long-Term Rating at 'AAA(mex)' with a Stable Outlook.

The affirmation reflects Fitch's expectations that UANL will sustain debt metrics commensurate with its SCP assessment of 'bbb-', while its ratings remain capped by Mexico's Sovereign IDRs (BBB-/Stable).

The coronavirus pandemic and related government containment measures worldwide create an uncertain environment for UANL in the near term. Material changes in revenue and cost profiles are occurring in the sector and are likely to continue in the coming weeks and months as economic activity suffers.

Our ratings are forward-looking in nature and Fitch will monitor developments in the sector as a result of the virus outbreak for their severity and duration. Fitch will incorporate revised base- and rating-case qualitative and quantitative inputs based on expectations for performance and assessment of key risks on an ongoing basis.


Key Rating Drivers

Standalone Credit Profile

Based on its Public Sector, Revenue-Supported Entities Rating Criteria, UANL's SCP is assessed at 'bbb-'. This is based on a 'Midrange' assessment for both Revenue Defensibility and Operating Risk combined with a strong leverage profile, measured as Fitch's net adjusted debt/EBITDA, below 4.0x in our rating case, with a 'Weaker' liquidity profile. The combination of these factors corresponds to a 'Midrange' Financial Profile assessment. The SCP is constrained stemming from counterparty risk. The SCP assessment also factors in peer comparison.

Revenue Defensibility - 'Midrange'

Fitch views UANL's revenue volatility as moderate due to low flexibility on tuition fees and modest demand risk. UANL benefits from a strong national reputation of academic excellence, continuously ranking in the top 10 in the QS ranking for Mexican public and private universities.

The institution also benefits from its unique location in the third most important state in terms of economic and industrial dynamism. This results in a sustained rate of national enrollment that puts the CAGR of undergraduates and postgraduates at 5.4% for 2016-2020.

UANL's tuition fees are low by international standards and around 50% of students are exempted from tuition fees due to scholarships or specific status, reflecting the active diversity policy implemented by the administration.

Legally, UANL can increase its fees up to the point it can cover operating expenses; however, since it is a public entity with a major public policy goal, UANL has not increased fees over the last seven years. Still, a strong market reputation has allowed the university to preserve its own revenues from fees collected. This revenue item had a CAGR 2016-2020 of 1.7%, based on preliminary figures for 2020.

From 2016-2020, on average, fees and academic-related revenues represented 12.6% of total revenue, while revenue from 'other services', non-academic such as consulting services, represented 12% of total revenue. This revenue stream has declined since 2013 and is the result of the public sector, UANL's major client, significantly reducing demand.

Over the last five years, state and federal subsidies have represented 74.8% of total revenues, on average. However, subsidies have a sound track record since allotment has been stable and predictable. Thus far subsidies are 'free' of political cycles. Over the last five years, there were mild changes between the budgeted and actual subsidy figures. Overall, Fitch does not expect to see any change in the revenue structure in the medium term.

Operating Risk - 'Midrange'

Fitch views UANL's operating costs as well-identified and, therefore, not affected by high volatility. Expenditure includes rigid items due to the nature of the education sector, with staff costs above 54%, on average, of total outlays.

We assess resource management risk as moderate as UANL does not rely on volatile items. The main constraint, in terms of resources, for public higher-education institutions is the availability of good teachers. However, given UANL's strong market position and academic excellence, even if private universities compete with UANL to attract the best teachers, the university's reputation has been its major asset to hire professors.

Fitch views capex pressure as 'Neutral' to Operating Risk. Capex is mainly funded by federal grants, such as Fondo de Aportaciones Multiple, and to a lesser extent by subsidies, and own revenues. UANL has demonstrated an adequate mechanism for capital planning and funding with debt maturity significantly within expected economic life. The overall infrastructure, IT and facilities, of the university are modern and in good shape.

Financial Profile - 'Midrange'

Strong Leverage Risk Profile: Preliminary numbers for 2020 show EBITDA was MXN438 million and Fitch expects EBITDA to continue within this range in the future, driven by the strong reputation of the institution. In our rating case, we expect debt to peak at MXN1,867 million in 2021. The use on interest rate coverage instruments and a smooth debt amortization profile mitigate debt servicing pressure. The State of Nuevo Leon does not guarantee UANL's debt.

UANL's leverage, or net adjusted debt/EBITDA, was at 1.2x in 2020 (estimated preliminary figures). This ratio should strengthen from 2021 onward due to the maturity of bank loans. In our rating case, Fitch expects this ratio to remain at 2.1x in 2024, hence, below 4.0x, that will keep this assessment as 'Strong'.

Weaker Liquidity Profile: The liquidity cushion, or excess annual cash flow after debt service for the financial year, plus the sum of readily available cash and committed liquidity lines at the beginning of the respective financial year/sum of annual operating expenses prior to interest expense, was below 0.33x at 0.13x for YE 2020 (estimated preliminary figures). In Fitch's rating case, we expect liquidity to continue at this level in 2024 at 0.12x. This trend drives the assessment as 'Weaker'. The combination of 'Strong' leverage with a 'Weaker' liquidity profile drives the final Financial Profile assessment of 'Midrange'.

Coronavirus Implications: 'Low Impact'

The coronavirus pandemic is having mild effects on UANL's tuition fees of less than 5% as of YE 2020. The dropout rate was subdued at less than 5%, so far. The strong national reputation of the university and its regional market position act as buffers. UANL's main revenue streams are national and state subsidies at 72% of total revenue.

Costs declined due to lower opex and savings on overhead costs, sports-related activities and travel expenses. The university expects to maintain its operating margin in 2021 and may be able to offset the drop in own revenues from academic activities with lower costs and interest expenses, due to cuts in the reference interest rate of its long-term debt.

Additional Risk Factors - 'Neutral'

In Fitch's view UANL does not face additional risks that could negatively affect its SCP. We view UANL's debt structure and contingent liabilities, management and governance, legal and regulatory, information quality and macro risks as 'Neutral'. With respect to local peers, UANL has a pension reserve fund of MXN8,718 million, as of YE 2020, that, in combination with regular contributions, gives financial sustainability to its pension liabilities.

Counterparty Risk

UANL's SCP is constrained due to the large proportion of federal subsidies to total revenue with a five- year average of 54.3% from a 'BBB-' counterparty. This large exposure to a lower-rated counterpart constrains the SCP of UANL at 'bbb-'.

Credit Linkage with the State of Nuevo Leon

Fitch considers UANL as a Government-Related Entity (GRE) to the state of Nuevo Leon (NL) and rates it using a 'standalone/constrained' approach under its Government-Related Entities Criteria. Based on our assessment of the strength of linkage with Nuevo Leon, and the incentive for the state to provide extraordinary support, we assess UANL's GRE score at '7.5' out of a possible maximum score of '60'. Fitch assesses UANL's IDR as stronger than state of Nuevo Leon since, in the case of financial distress or default, Nuevo Leon cannot legally intervene on behalf of the university's financial resources or operations

Status, Ownership and Control: 'Weak' (0 points)

UANL is a public establishment carrying out education and research activities. The legal autonomy status for its financial planning and operations underpins this assessment. The State Government of Nuevo Leon's influence on the university's financial policies and operational activities is 'Weak'.

Support Track Record and Expectations: 'Moderate' (2.5 points)

The assessment reflects the wide public sector support that UANL benefits from the state of Nuevo Leon. Besides the subsidies from the state, financial support has been received but is irregular and moderately supportive. Notwithstanding a 'Moderate' assessment, UANL has a strong leverage profile where federal and state subsidies play a major role; therefore, financial support could be expected to be granted if needed.

Socio-Political Implications of Default: 'Moderate' (5 points)

The assessment reflects the significant educational mission that is performed by UANL, which is Nuevo Leon's largest and most prestigious public higher-education institution. Nationally, it is ranked eighth within public and private universities. However, the private sector could act as a substitute with only minor or temporary disruption to the service offered by UANL. A financial default would not materially affect the provision of classes since these services are of moderate political or economic importance.

Financial Implications of Default: Weak (0 points)

Fitch believes a default of UANL would have minimal effects on Nuevo Leon's and other state GREs' cost of funding. UANL is perceived as an autonomous entity by investors and its debt is not consolidated into Nuevo Leon's debt.


Derivation Summary

UANL's SCP at 'bbb-' reflects 'Moderate' revenue flexibility allowed by the institution's strong national attractiveness and reputation, and 'Midrange' operating risks. The assessment also reflects UANL's adequate financial profile with net adjusted debt/EBITDA that we expect, in our rating case, to remain at 2.1x in 2024.

Under our GRE criteria, Fitch classifies UANL as an entity with a weak linkage to the state of Nuevo Leon and assesses the ability and willingness of the state to provide support to the university as weak. Based on our assessment of the strength of linkage and incentive to support by the government, UANL scores '7.5' under Fitch's GRE Criteria, which combined with the SCP of 'bbb-', leads to a 'standalone' rating approach and a Long-Term LC IDR of 'BBB-'.


Key Assumptions

Fitch's Key Assumptions Within Its Rating Case for the Issuer Include

Our rating case is a "through-the-cycle" scenario, which incorporates a combination of revenue, cost and financial risk stresses. This is based on the 2015-2019 figures and 2020-2024 projected ratios.

The key assumptions for Fitch's rating case scenario include:

--Operating revenue of CAGR 2020-2024 of 6.1%

--Opex of CAGR 2020-2024 of 6.7%

-- An average net capital balance of approximately negative MXN431 million.

--Additional long-term debt at 5% of total revenue in 2021, in line with the national debt regulation framework.

--Cost of debt with interest rates projected from 5.5% in 2021 to 7.0% in 2024. We adjust rates to incorporate UANL's interest rate coverage instruments.


RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

-- An upgrade of Mexico's IDR since UANL's SCP is currently constrained at 'bbb-'.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--A downgrade of Mexico's Sovereign Rating, assuming UANL's SCP remains unchanged;

--If the liquidity cushion falls consistently below 0.125x; or

--If net adjusted debt/EBITDA is larger than 4x.


Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].


REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations

Unless otherwise disclosed in this section, the highest level of Environmental, Social and Corporate Governance (ESG) Credit Relevance is a Score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.



Universidad Autonoma de Nuevo Leon (UANL); Local Currency Long Term Issuer Default Rating; Affirmed; BBB-; Rating Outlook Stable
----; National Long Term Rating; Affirmed; AAA(mex); Rating Outlook Stable

Contacts:
Primary Rating Analyst
Tito Baeza,
Associate Director
+52 55 5955 1606
Fitch Mexico S.A. de C.V.
Blvd. Manuel Avila Camacho No. 88, Edificio Picasso, Piso 10, Col. Lomas de Chapultepec,
Mexico City 11950

Secondary Rating Analyst
Alberto Hernandez Villarreal,
Associate Director
+52 81 4161 7059

Committee Chairperson
Guilhem Costes,
Senior Director
+34 91 076 1986

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com

Additional information is available on www.fitchratings.com
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Additional Disclosures For Unsolicited Credit Ratings
Endorsement Status
Endorsement Policy

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE.

Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.