DBRS Confirms University of Guelph at “A,” Stable Trend

DBRS has today confirmed the Senior Unsecured Debt rating of the University of Guelph (Guelph or the University) at “A” with a Stable trend. The University has made notable progress in eliminating its structural deficit and is now budgeting for recurring surpluses to repay past accumulated shortfalls. However, despite the temporary pension funding relief provided by the Province of Ontario (the Province; rated AA (low) by DBRS), the potential for a significant increase in annual funding requirements to deal with sizable unfunded post-employment benefits remains a significant concern and was a key factor behind the rating downgrade in February 2011. In addition, the current five-year capital plan is expected to boost debt. However, provided the erosion in pension liabilities is stabilized, the additional debt should remain manageable for the rating, supported by Guelph’s strong academic profile, growing endowment assets and stronger-than-expected enrolment.

For 2010-2011, Guelph recorded a surplus (excluding unrealized gains and losses on swaps) of $25.9 million, up from a shortfall of $2.6 million in 2009-2010 and the largest surplus since 2000-2001. Operating revenues grew by 7.0% year over year, supported, in part, by stronger-than-expected enrolment growth of 4.4%. Total expenditures rose mildly by 2.5% as the increase in salaries and benefits was fairly moderate, partly due to a further reduction in staff. The 2011-2012 budget points to a surplus of $6.0 million on an operating fund basis. Guelph is targeting only modest enrolment growth in specific programs, which should help to increase revenues, although persistent pressures from rising salary and benefit costs will boost spending.

As of April 30, 2011, total debt stood at $185.1 million, up by 3.3% from the prior year. However, greater-than-expected enrolment growth helped reduce debt per full-time equivalent (FTE) to $8,961 from $9,057 in 2009-2010. Guelph is entering the first year of a new five-year capital plan with potential debt needs of $121 million. This is expected to push debt per FTE above $10,000 in 2011-2012 and to around $11,500 by 2015-2016. DBRS notes that while stronger-than-expected enrolment growth has reduced the peak from the $12,000 per FTE that was expected last year, it will nonetheless be one of the highest debt burdens among DBRS-rated universities.

The Province announced in May 2011 that Guelph qualified for Stage 1 temporary solvency funding relief which gives the University until 2014 (its next valuation date) to improve the sustainability of its pension plans. Guelph believes that increased contributions and the removal of certain early retirement benefits, secured through a recent round of negotiations with key labour groups, will help it achieve Stage 2 relief. Nevertheless, the increase in annual pension contributions could still be significant and continues to pose a threat to the operating budget over the medium term. As such, the University’s strong academic profile and continuation of disciplined financial management will be essential to ensure the credit profile remains intact during a period of rising debt and post-employment benefits.

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.