DBRS Confirms Queen’s University at AA, Trend Stable

DBRS has today confirmed the Senior Unsecured Debt rating of Queen’s University (Queen’s or the University) at AA. The trend is Stable. Despite the continuation of challenging operating conditions, the University’s solid academic profile and strong endowment resources provide resilience to the credit. Modest future borrowing needs and a renewed commitment to balance the budget by 2012-13 will help stabilize the credit profile in the short to medium term.

Queen’s posted an $8.7 million operating deficit in 2010-11. Revenue rose on account of 2.9% enrolment growth and tuition fee increases, which helped boost tuition revenue by 6%. A renewed commitment to restrain costs helped to limit the growth in salaries and benefits to just 0.5% in 2010-11, down from a 9% increase in the previous year (4% excluding pension expenses). The debt burden continued to put pressure on the credit profile, rising by 23% to $237.7 million, or $11,967 on a per full-time equivalent (FTE) basis, by April 30, 2011; however, this increase was already factored into last year’s rating downgrade. Endowment per FTE, which now sits at over $28,000, remains the highest amongst DBRS-rated universities, and has rebounded considerably since the financial markets downturn in 2008-09. However, recent stock market volatility will put new pressures on a further recovery. The University’s interest coverage ratio has also firmed up, following two years of negative results, and sits at a more adequate 3.1 times.

Based on a recent estimate, Queen’s unfunded pension liability is now over $300 million, which causes concern given the potential impact of rising contributions on cash flows. Recently concluded collective agreements with four large employee groups (including the faculty association) include increased employee pension contributions, in an effort to address the plan’s sustainability. In addition to setting a pattern for upcoming labour negotiations, this development should allow the University to qualify for the new provincial pension solvency relief program.

Queen’s projects a budget deficit in 2011-12; however, several new management practices have been initiated in order to achieve a balanced operating budget by 2012-13. These new measures are intended to generate additional revenue, find spending efficiencies and contain labour costs. Nonetheless, restoring balance will be very challenging, due in part to rising pension expenses and the restrictions imposed on tuition increases by the Province of Ontario (rated AA (low) Stable by DBRS). As a result, increasing enrolment is one of the few options the University will have to boost revenues, although Queen’s has one of the most conservative enrolment strategies among DBRS-rated universities, with only 100 additional first-year undergraduate students planned for 2011-12. If the provincial funding model persists, the current status quo may prove unsustainable. Overall, DBRS is encouraged by the resolve shown by the University in addressing challenges thus far, but notes that its credit profile remains under pressure and little room is left for new debt, in light of the pension deficit and tight operating environment.

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.