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

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of the University of Guelph (Guelph or the University) at “A,” both with Stable trends. Guelph’s strong academic profile, balanced operating position and solid enrolment performance provide support to the rating. However, rising pension funding requirements and additional debt required under the capital plan will continue to use up flexibility within the existing rating. Furthermore, the Province of Ontario (rated AA (low) by DBRS) is in the midst of a significant fiscal recovery plan that entails considerable expenditure restraint suggesting that the funding environment for post-secondary institutions could be constrained over the medium term.

For the year ended April 30, 2012, Guelph recorded a sound surplus (excluding unrealized losses on swaps) of $29.5 million, or 4.2% of revenues. Total revenues grew by 3.0%, driven primarily from better-than-expected enrolment, up by 4.3%. Total expenditures advanced by 2.6% and incorporated new collective agreements with all major labour groups. The current fiscal year marks the first year of the University’s new multi-year plan, which points to an operating fund surplus of $6.0 million in 2012–2013. In light of the significant effort undertaken in the prior multi-year plan, departments have been given one year of reprieve before pursuing additional cost reduction or revenue enhancement efforts of 2.5% to 4.0% annually in the subsequent four years. Even if the University is successful at achieving further pension solvency relief (Stage 2), the impact of higher pension contributions beginning in 2014–2015 have not been fully addressed in the new multi-year plan and may create a significant operating shortfall, absent any further corrective action.

In 2011–2012, total debt grew by 10.4% to $204.2 million. However, rising enrolment helped to limit the increase in debt per full-time equivalent (FTE) to $9,481, up from $8,961 the prior year. Guelph is currently in the second year of a revised five-year capital plan, which projects additional debt needs of up to $120.6 million, including $29.1 million 2012–2013. This represents an increase of almost $38.0 million from DBRS’s last review although the increased debt will be entirely serviced through ancillary services and dedicated student fees. Nevertheless, this could push debt per FTE to roughly $12,800 by 2015–2016, potentially one of the highest debt burdens among DBRS-rated universities. Given the significant increase in pension funding obligations anticipated by 2014–2015 and the likely strain it will impose on operating performance, DBRS believes there would be limited room within the current ratings to incur additional debt beyond what is already incorporated in the current capital plan. DBRS also notes that the University has yet to find a way to restore the sustainability of its plans. This will be instrumental in stabilizing the credit profile.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Public Universities (October 2012), which can be found on our website under Methodologies.