DBRS Confirms Wilfrid Laurier University at “A,” Maintains Negative Trend

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Wilfrid Laurier University (Laurier or the University) both at “A.” The trend on both ratings remains Negative as a final decision regarding the financing strategy for recently acquired residential apartment buildings and future debt needs, beyond those articulated in the current capital plan, have yet to be determined. In particular, Laurier is considering the use of a trust structure with non-recourse debt to finance the recently acquired properties, which could partly offset the impact of additional borrowing related to a large capital program. From an operating perspective, Laurier continues to outperform budget targets although DBRS expects that results will come under pressure over the medium term in light of a more restrictive provincial tuition fee framework and constrained funding growth. In addition, annual pension contributions are expected to increase notably, adding to an already challenging operating outlook.

In 2011–2012, operating performance weakened somewhat from the prior year as the University recorded a surplus of $7.9 million, or 2.6% of revenues, although this was still a better result than what was budgeted. Total revenues were up solidly by 7.7% as enrolment of 16,181 full-time equivalent students (FTEs) surpassed expectations. However, this was outpaced by expenditure growth of 9.3%, largely as a result of increased outlays for wages and benefits. For 2012–2013, the University budgeted for a modest surplus, after incorporating prior-year reserves. Management has indicated that enrolment is once again tracking ahead of plan and spending should come in below budget, which suggests that targets will again be beat. Although Laurier’s multi-year budget pointed to the need to make further adjustments to address a structural deficit, it’s likely that better-than-planned results in 2012–2013 will provide some added time to make necessary changes. A revised multi-year plan is currently in development and will need to account for reduced tuition flexibility and the likelihood for continued funding restraint at the provincial level. In addition, labour agreements coming up for renewal and the need for increased pension contributions following the upcoming valuation will make the task of maintaining a balanced operating position a challenging one.

Debt rose significantly in 2011–2012, up by $57 million, or almost 50%, as Laurier employed a short-term bank facility to finance the acquisition of a portfolio of residential apartment buildings. However, the increase was less than expected and somewhat mitigated by better-than-planned enrolment, resulting in debt per FTE of $10,723. Interest coverage fell to 3.9 times from 4.6 times a year earlier although this does not yet reflect the full-year impact of additional debt.

Laurier’s three-year capital plan calls for $244 million in spending between 2012–2013 and 2014–2015, which could involve as much as $78 million in additional debt. As a result, debt per FTE will reach approximately $11,500 by April 30, 2013, and could potentially exceed $14,000 per FTE in the next year or two. This is below the peak assumed at the time of DBRS’s last review but still high for the rating. Of note, the University is considering the use of an arm’s length trust structure for recently acquired real estate holdings, which would carve out the assets and related debt. Provided that this entity’s debt is solely secured by the real estate assets and non-recourse to the University, this would result in debt per FTE returning to around $10,700, which is more manageable for the rating. Consequently, the implementation of the trust structure, expected by DBRS’s next annual review, and the maintenance of a sound operating performance with increased comfort that capital needs remain manageable over the medium term could lead to the Stable trend being restored. An inability to limit debt growth as contemplated is likely to result in a one notch downgrade.

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.