DBRS Confirms McMaster University at AA (low)

DBRS has confirmed the rating of McMaster University (McMaster or the University) at AA (low) with a Stable trend. The rating reflects the University’s solid academic profile and stable operating performance, and acknowledges that strong endowment resources continue to provide resilience to the credit. Furthermore, its overall financial position compares well with peers in the same rating category. However, similar to other DBRS-rated universities, McMaster is challenged by significant operating pressures, posed by cost inflation and significant employee benefit liabilities, although a plan exists to gradually address the latter.

A consolidated surplus of $22.0 million was recorded for the year-ended April 30, 2011, ahead of the previously budgeted deficit of almost $9 million. Revenue growth exceeded the growth in expenditures for the second consecutive year, helped by increased program-specific government funding, enrolment growth of 1.6%, positive investment returns and continued cost management. The solid operating results and a slight reduction in the debt balance led to a strong interest coverage ratio of 8.8 times. Capital market performance during fiscal 2010-11 allowed for gains in investment income and the maintenance of endowment resources at a high level.

Unfunded pension and post-employment liabilities declined to $481.0 million in 2010-11, upon the successful implementation of employee contribution increases and revised retirement dates, as well as measures to close defined pension plans to new entrants of some labour groups. The University has made efforts to change its pension and post-retirement benefits, particularly for new employees, although these changes will have little impact on the near term, as upcoming obligations cannot be easily amended for current pensioners and long-serving staff.

DBRS notes that McMaster has been approved for Stage 1 solvency relief for its salaried pension plan and its hourly pension plan under amendments made in May 2011 to the Ontario Pension Benefits Act. As required under Stage 1 of the solvency funding relief for the salaried plan, McMaster is required to make annual special payments of nearly $21 million until the next valuation due July 1, 2014. As per a July 1, 2010, valuation of its hourly pension plan, special payments are required of almost $700,000 per year until the next valuation due July 1, 2013.

McMaster budgeted for a minor deficit of $6.3 million for the 2011-12 fiscal year and preliminary indications point to close to break-even results. The budget assumed virtually flat enrolment growth, which was exceeded with actual enrolment growth of 2.1%. Debt is expected to have declined in 2011-12 to approximately $140 million, in line with the debt amortization schedule and the repayment of a residential mortgage in the year. The University is currently developing its 2012-13 budget, and despite strong operating results posted in recent years, salary increases and rising employee benefit deficiencies combined with a lack of inflation indexation in operating grants, limited fee-setting autonomy and upcoming capital and deferred maintenance and capital expenditures will lead to the continuation of tight operating conditions.

While there are no immediate plans or an urgent need for new debt, the debt advantage could erode should McMaster choose to move ahead with consideration to issue up to $100 million for capital projects, a plan which has been in contemplation for more than five years. The credit profile maintains some flexibility for new debt, although the potential borrowing could bring the University to a debt-per-FTE level that is at the top of its rating category.

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.