DBRS Changes Trend on Wilfrid Laurier University to Negative from Stable

DBRS has today confirmed the Senior Unsecured Debt rating of Wilfrid Laurier University (Laurier of the University) at “A” and changed the trend to Negative from Stable. Laurier’s latest five-year capital program points to a significant increase in debt well beyond what was anticipated at the time of DBRS’s last review. DBRS notes that, in a normal operating environment, the rise in debt could be manageable within the current rating given Laurier’s proactive management and solid enrolment history. However, the growing pension fund deficiency faced by the University and many of its peers and a tight funding environment point to the potential erosion in financial metrics to levels no longer consistent with an “A” rating. In addition, there is the possibility of further capital projects beyond those identified in the current plan.

For the 2010-2011 fiscal year, an operating surplus of $11.3 million was recorded, an improvement over the previous year and the breakeven result that had been predicted. Revenue from tuition fees was up substantially, helping overall revenue to climb by 9.1% year over year. Expenses were up by 8.6% with salary and benefit costs being the main driver. Total debt fell by a little over $10 million as mortgages were repaid with sinking funds, driving debt per full-time equivalent (FTE) down to $7,490, a level that compares favourably with other similarly rated peers. However, the pension plan deficit continued to rise, reflective of a lower discount rate, and stood at $82.1 million by fiscal year-end.

The operating budget points to a modest deficit for 2011-2012, although recent projections suggest the University is likely to outperform its target thanks to better-than-expected enrolment growth. The structural deficit is expected to persist for the remainder of Laurier’s three-year operating budget, which assumes only modest enrolment growth and a continuation of the current provincial funding and tuition regimes going forward. DBRS expects annual pension funding requirements to rise notably and the provincial funding environment to remain constrained in light of budgetary challenges at the provincial level. The University plans to address any shortfall in 2012-2013 through the allocation of prior-year surpluses before requiring cost-cutting measures in the following years to minimize any imbalance.

Laurier has an ambitious capital plan totalling approximately $270 million over the five years ending in 2015-2016. Of this total, approximately $110 million may be funded through a combination of long-term debt and draws on a line of credit, with as much as $68 million to be added in 2011-2012. As a result, debt is expected to end the 2011-2012 fiscal year at $11,500 per FTE and could temporarily reach approximately $15,000 over the next two to three years, before falling back to $13,300 per FTE as government grants are received. However, DBRS notes that there are more capital needs on Laurier’s radar, combined with higher pension contributions which raise the possibility that debt will remain at a level not viewed as affordable within the current rating for an extended period of time. The University indicated that it continues to explore various financing options, which could entail greater draws on reserves. As such, it may take one to two years before clarity is provided on the pace and extent at which borrowing will materialize.

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.