DBRS Confirms University of Toronto at AA, Trend Stable

DBRS has today confirmed the Senior Unsecured Debentures rating of the University of Toronto (the University or UofT) at AA. The trend is Stable. An established academic profile, substantial endowment assets and prudent management practices continue to provide considerable support to the credit in the face of ongoing difficult operating conditions.

UofT posted a $7.2 million operating surplus in 2010-11, which was down year-over-year but still solid relative to its peers. Total revenues rose by 5%, owing to across-the-board increases in revenues, led by a sustained enrolment growth of 1.8% and full government funding for new students. Strong gains in investment income and donations, as the rebound in the financial markets continued within the year (albeit at a slower clip), provided an additional lift. Salary and benefits expenses rose markedly, and accounted for a growing proportion of total spending, which rose 6.9% in 2010-11. Solid returns on pooled investments helped to boost endowment assets to $1.54 billion, the largest among Canadian universities, corresponding to $23,110 on a full-time-equivalent (FTE) basis. Despite a difficult operating environment, the University has once again balanced its operating budget in 2011-12. Operating revenue is expected to grow on account of higher tuition revenues from enrolment growth projected at 2.5% and tuition fee increases, while expenditures will continue to be challenged by wage and benefits pressures. Renewed cost-containment measures are expected to provide an offset, however.

The debt burden was stable year-over-year, ending the fiscal year at $526.8 million, or $7,909 per FTE, while interest coverage remained strong at 5.2 times. However, DBRS notes that the University is still expected to borrow up to $200 million in the near term, which will push its debt up over $700 million, or to approximately $11,000 per FTE. While this has been factored into the credit profile for some time, and is normally manageable for a university with UofT’s academic profile and financial resources, considerable resolve will be required to address the growing unfunded pension and post-employment benefit liabilities, which are estimated at $1.39 billion and $454 million, respectively, at April 30, 2011. UofT has made a large $150 million lump sum payment (in June 2011 and expects to make another by June 2014) into its pension plans, and intends to substantially boost special pension contributions to improve the current deficit position. This will put increasing pressure on the budget and notably reduce UofT’s financial flexibility in the years ahead. In addition, the University is seeking to negotiate increased employee pension contributions as part of current and upcoming labour negotiations with unions that have members in the University’s pension plans – a difficult task, but necessary if UofT is to qualify for the provincial solvency relief program. Qualification would allow the University to amortize special pension payments over a longer period, still testing the University’s resolve, but with a relatively more manageable impact on cash flows. Consequently, DBRS expects the new debt to use up most of the flexibility left in the current rating, but it is unlikely to put undue pressure on the credit profile provided considerable budget discipline is maintained.

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.