OREANDA-NEWS. Fitch Ratings says in a new comment that England's higher education sector is facing falling liquidity and increasing borrowings as it strives to bridge the gap left by austerity measures and reduced funding. Universities are under increasing pressure to look for alternative funding in the current climate of lower grants for teaching and research, as well as competing for the more lucrative overseas students market.

Borrowing by UK universities in the capital markets through bonds and private placements is rising. In the last couple of years, bonds issued by English and Welsh universities have risen; GBP1.25bn of bonds were issued last year. The sector is looking to increase capital investment over the next few years, which is likely to be funded through long-term borrowing; the capital markets could be an important source of this funding.

Universities are investing in their teaching, research and student facilities. They are increasingly having to invest in their campuses and student accommodation to widen their appeal given the rise in fees and the selectivity of students in choosing a university. Investing in new facilities will attract more international, non-EU students who pay higher tuition fees and have more choices among international offerings. Higher tuition fees and higher revenues will help compensate for the rising debt, which in turn will help stabilise ratings.

Based on university forecasts submitted to the Higher Education Funding Council for England (HEFCE), full-time domestic and EU undergraduate numbers are expected to increase 8.5% by financial year ending March 2018 compared with FYE14. In terms of overseas (non-EU) students, Fitch expects numbers to rise 4%-6% over the next four years.

The sector's credit quality is overall sound, due to steady income from tuition fees and the backing from the state. However, universities operate with narrowing margins and the credit differentiation between their financial performances is likely to widen. Unlike in the US, endowment funding represents only a small proportion of the revenues of UK universities.