DBRS Confirms University of Ottawa at AA, Stable Trend

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debt rating of the University of Ottawa (uOttawa or the University) at AA with Stable trends. The credit profile of the University remains sound, bolstered by conservative management and budgeting practices, a low debt burden and sizable expendable resources. DBRS expects a tightened operating environment, pension challenges and the implementation of the new strategic plan to lead to greater strain on resources. Further, a new capital plan was recently approved and calls for $80 million in external borrowing. Nevertheless, the University’s sound academic profile, consistent enrolment growth and track record of operating efficiency are expected to continue to provide considerable resilience to the credit.

Although it was down from the prior year, uOttawa reported a solid $36.2 million surplus, or 4.1% of revenues, in 2011-12, bolstered by stronger than expected enrolment growth of 3.0%. Total debt declined to $174.1 million in 2011-12 from $199.3 million in the prior year as a loan was repaid during the year, bringing the debt per full-time equivalent (FTE) to $4,005, the lowest among DBRS-rated universities. Solid operating performance helped to keep interest coverage at a sound 5.6 times (x). Endowment assets of $4,229 per FTE are low relative to other similarly rated universities, although expendable resources remained sizable at $191.6 million, or 110% of total debt, adding meaningful financial flexibility.

The University presented a balanced budget for 2012-13, and preliminary indications suggest performance is tracking ahead of budget. However, DBRS expects that maintaining a balanced budget will become increasingly difficult to achieve in the years ahead, as the operating environment tightens. The Province of Ontario (the Province; rated AA (low), Stable) recently revised the tuition framework, limiting annual tuition fee increases from an average 5% to 3% for the next four years, a move that uOttawa anticipates will lead to a loss of $3 million in tuition revenues annually, compounding to roughly $40 million over a four- to five-year period. Although not yet finalized, initial budget estimates suggest uOttawa could face a deficit of roughly $15 million in 2013-14, and further deficits are foreseen over the longer-term planning period. Additionally, the revised actuarial valuation, as at January 1, 2013, is expected to reveal a sharp increase in the pension deficiency and could potentially trigger large special payments.

The board approved a new $127 million five-year capital plan in June 2012; additional work will also be undertaken to address sizable deferred maintenance needs. Given the expectation of a worsening pension deficiency, and a tightening operating environment, the University decreased its external borrowing capacity for the new capital plan from $100 million to $80 million. DBRS views this move as prudent, especially in light of the increased demand on resources that will accompany the implementation of the new strategic plan, Destination 2020. Due to the new debt needs, in the years ahead debt-per-FTE could rise to approximately $5,600, while interest coverage is expected to move down to the 3.0x to 4.0x range. DBRS views this as manageable, given the University’s considerable level of financial resources, sound operating track record and risk management framework. Nevertheless, DBRS notes that amid the challenges, a renewed focus on spending discipline will likely be required to prevent a meaningful erosion in the financial 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, which can be found on our website under Methodologies.