DBRS Confirms McMaster at AA; Trend Remains Negative

DBRS has today confirmed McMaster University’s (McMaster or the University) rating of AA. However, the trend remains Negative as the University may take on a significant amount of new debt amid a rapidly tightening operating environment. Originally slated for 2008-2009, the borrowing has been delayed since the last DBRS review, due to a weakening of financial flexibility and unexpected government capital funding. The University may still issue approximately $100 million of debt at some point in the next few years, and will rely on internal borrowing to fund its capital program in the meantime.

As at all universities in Ontario, the operating position has tightened at McMaster, with 2007-2008 marking the University’s first consolidated deficit in many years. Although financial resources continue to provide solid support to the rating, including expendable resources covering 135% of debt at April 30, 2008, McMaster will draw on internal reserves to fund capital projects and the employee benefits funding deficits. The weakened operating environment has made plans for about $100 million in debt less affordable, as exhibited by the much lower interest coverage ratio, which fell below McMaster’s internal debt policy target level. Recent indications point to the likely continuation of poor results in 2008-2009 and 2009-2010, as continued operating cost pressures and limited provincial grant increases will likely outweigh regulated tuition hikes and budget reductions. Moreover, the tumultuous investment markets will also have an impact on results by dampening endowment fund contributions and increasing unfunded pension liabilities.

DBRS notes that McMaster is implementing restructuring initiatives in order to restore fiscal balance in the next three to five years. However, a prolonged period of operating deficits, a considerable rise in the funding deficits for post-employment benefits liabilities or materialization of McMaster’s borrowing plan would further pressure financial flexibility and reduce debt metrics to a level that is not consistent with a AA rating. As such, DBRS expects the downward pressure on the University’s rating to continue to intensify over the coming year.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Universities, which can be found on our website under Methodologies.

This is a Corporate (Public Finance) rating.