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.
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.
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-'.
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.
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.
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
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