DBRS Confirms University of Ottawa at AA, Stable Trend

DBRS has today confirmed the long-term rating of the University of Ottawa (uOttawa or the University) at AA with a Stable trend. The credit profile of the University remains sound, as conservative management and budgeting practices, healthy enrolment growth and sizable expendable resources continue to support a solid operating position. uOttawa will introduce a new five-year capital plan in the coming months. DBRS expects a tight operating environment to persist, which, combined with the continued growth in unfunded pension liabilities, will constrain the University’s borrowing capacity. However, the University’s sound operating position and limited debt usage to date provide moderate flexibility to add new debt within its current rating.

uOttawa once again posted strong operating results in 2010-11, with a consolidated surplus of $51.5 million. Total revenue rose by 7.3% year-over-year, as stronger-than-expected enrolment growth of 4.9% helped to bolster tuition receipts and government operating grants. Total expenditure increased by 6.9%, driven by salary and benefit pressures, higher amortization expenses and a rise in student aid contributions. A reduction in interest expense on account of slowly declining leverage and continued cost-containment efforts helped to contain other expenses. The University continued to ramp up capital investments in 2010-11, with funding coming from internal reserves and government grants. This helped to keep the debt burden at a stable $199 million, or $4,722 on a per full-time equivalent (FTE) basis, one of the lowest in the sector. Interest coverage ratio remained solid, rising to 6.9 times due to the absence of new borrowing and improved operating results.

uOttawa presented a balanced operating budget for 2011-12, based on expected enrolment growth of 2.1% and an average tuition fee increase of 4.3%. Operating fund revenues were projected to increase by 6.2% year-over-year, while expenses were expected to grow by 6.5% year-over-year, largely driven by growth in salaries and benefits, along with higher student aid expenses. Preliminary 2011-12 results show a small operating fund surplus of $3.2 million as of January 2012, though the University has had to tap into reserves, which it intends to replenish with future surpluses. Significant expansion of the student population has led to increasing space constraints; as such, the University intends to moderate enrolment growth expectations to 500 students per annum over the next five years, which in turn will reduce enrolment-linked provincial funding.

The next actuarial valuation, planned for January 2013, is expected to reveal results that will exacerbate the current pension challenge, largely due to the current low interest rate environment and volatile capital markets. This is likely to trigger sizable annual pension special payments to fund the deficit. uOttawa is currently in the final year of its $150 million five-year capital plan, and a new five-year plan will be presented to the board that could include additional borrowing needs of up to $100 million. Accounting for the expected moderation in enrolment growth, this could lead to a rise in the University’s debt burden to approximately $7,000 per FTE and a fall in the interest coverage ratio to within the three to four times range. DBRS views these credit metrics as adequate within the current rating, given uOttawa’s considerable level of financial resources, sound operating track record and diversified revenue base. However, the tight operating environment and the ongoing pension and post-employment benefit liabilities challenge will limit its ability to increase leverage to the $10,000 per FTE level set under its debt management policy.

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.