DBRS Confirms McMaster University at AA (low)

DBRS has today confirmed the rating of McMaster University (McMaster or the University) at AA (low) with a Stable trend. The rating reflects the University’s solid academic profile and improved operating performance, and acknowledges that strong endowment resources provide resilience to the credit. Furthermore, the overall financial position compares well with peers in the same rating category. McMaster posted a consolidated surplus of $11.7 million at year-end April 30, 2010, rebounding from the reported 2009 deficit of $54.0 million, which contributed to a rating downgrade in April 2010. Revenue growth exceeded the growth in expenditures, reversing the trend of the previous two fiscal years. However, similar to other Canadian universities rated by DBRS, the University is challenged by significant operating pressures, posed by cost inflation and rising employee benefit liabilities.

The consolidated surplus of $11.7 million in 2009-10 ended two years of consecutive deficits. Good cost containment measures contributed to the positive results, however, the extent of the operating surplus was also attributable to the unbudgeted receipt of year-end funding from the provincial government of $5.5 million. Total revenue growth of 13.2% was assisted by increases in tuition fees, significant year-over-year growth in investment income and the upward trend in the number of full-time equivalent (FTE) students with a gain of 3.7%. Increases in labour costs and student aid expenses contributed to a year-over-year increase in operating expenses of 3.9%. The improved operating results led to the resurgence of interest coverage, at 7.7 times. The stock market rebound in 2009 and 2010 provided some relief to previous investment losses realized during the financial crisis, maintaining financial resources at a high level.

Despite the strong operating results posted in 2009-10, salary increases and rising employee benefit deficiencies combined with a lack of inflation indexation in operating grants, limited fee-setting autonomy and upcoming capital and deferred maintenance expenditures will lead to the continuation of tight fiscal climates. To that point, McMaster projects a minor deficit for the 2010-11 fiscal year. Unfunded pension and post-employment liabilities reached $589.9 million in 2009-10, partly due to a decrease in the discount rate, and DBRS expects that McMaster’s next pension valuation, due July 1, 2011, will show a significant increase in the amount of pension liabilities because of the low interest rate environment. The University has made efforts to change its pension and post retirement benefits, particularly for new employees, although these changes will have little impact on the near term as upcoming obligations cannot be easily amended for current pensioners and long-serving staff. The impact of these liabilities and inflationary labour costs will create some operating pressure over the near term.

Overall, the University maintains a solid credit profile, supported by its superior academic reputation, substantial financial resources, and management’s efforts to resolve inflationary operating expenditures. Debt remains low relative to rated peers, at $153.3 million or $6,129 per FTE, as at April 30, 2010, down slightly from the previous year. The debt advantage could erode should the University choose to move ahead with its consideration to issue up to $100 million in debt for capital projects, though at present, there are no formal plans to do so. At AA (low), however, the credit profile maintains flexibility for new debt.

Note:
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 rating did not include issuer participation and is based solely on publicly available information.