DBRS Downgrades Brock University to “A” on Rising Debt Burden, Trend Stable

DBRS has today downgraded the rating of Brock University’s (Brock or the University) Senior Unsecured Debentures to “A” from A (high). The trend has been changed to Stable from Negative. Brock is seeing a gradual recovery in operating results, but interest coverage remains weak and the anticipated rise in debt points to the likely continuation of a tight credit profile no longer consistent with an A (high) rating.

The University maintains a weak operating position but continues on its plan to gradually restore balance, having posted a deficit of $7.6 million, or 3.1% of revenues in 2009-2010. Enrolment growth of 5.8% contributed favourably to results along with additional provincial funding. For 2010-2011, the budget points to a further deficit of $9.1 million although a recent fiscal update indicates that strong revenue growth should contribute to better-than-expected year-end results. Notwithstanding the measured improvement in budgetary performance, DBRS expects the operating environment to remain tight, reflective of the Province of Ontario’s weak fiscal position and a steadily rising cost environment.

Brock is undertaking a sizeable capital plan, which includes the development of the Cairns Family Health and Bioscience Research Complex (CFHBRC) at an estimated total cost of $111.5 million, and the Marilyn I. Walker School of Fine and Performing Arts (MIWSFPA) projected to cost $47.4 million. Combined, these projects are expected to push debt up by roughly 40% from current levels. This will lead to a debt per full-time equivalent (FTE) ratio of close to $9,000, up from $6,568 as of April 30, 2010, and will erode the low-debt advantage that Brock has long held.

While Brock’s interest coverage ratio improved to 1.2 times in 2009-2010, from zero a year earlier, it nonetheless remains weak in relation to most other DBRS-rated universities and could be further strained with the addition of new debt over the next two to three years absent a continued improvement in operating results. Furthermore, the possibility of a new business building is being contemplated although the University indicated that this project is at a very preliminary stage and will not proceed without substantial funding commitments from senior governments and potential donors. In DBRS’s view however, the inclusion of the business building as a priority of the current fundraising campaign, increases its likelihood of occurring and could lead to additional debt needs in the years ahead. At “A”, however, the University’s credit profile maintains flexibility for new debt.

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.