DBRS Confirms McMaster University at AA (low)

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debt rating of McMaster University (McMaster or the University) at AA (low) and AA (low), respectively, with Stable trends. The ratings reflect the University’s strong academic profile, sound operating performance in recent years, and sizeable expendable resources that provide resilience to the credit. Despite considerable progress in slowing expenditure growth for employee compensation and benefits in recent years, DBRS expects a tighter operating environment due to rising pension funding expenses, large deferred maintenance needs and general baseline inflation that will strain resources over the medium term.

For the year ended April 30, 2012, McMaster reported a consolidated surplus of $9.1 million, down from $22 million in 2010-11. In a reversal of trend, expenditure growth of 4% outpaced revenue growth of 2.4%, driven by general operating cost inflation and higher salaries and benefit expenses. The University maintained a healthy interest coverage ratio of 6.4 times, down slightly for the year due to the narrower surplus position. Although investment gains were muted in 2011-2012, McMaster’s endowment grew by 1.2% to $519.2 million. This equates to $20,023 on a full-time equivalent (FTE) basis, one of the highest among DBRS-rated universities. Though a deficit was budgeted for 2012-2013, preliminary indications suggest that McMaster is on track to again report a modest consolidated surplus, supported by enrolment growth of 1.6% in 2012-2013.

The Province of Ontario (the Province; rated AA (low)) recently revised the provincial tuition framework, limiting annual undergraduate tuition fee increases from an average of 5% to 3% for the next four years. McMaster has assumed flat enrolment growth and a 3% undergraduate tuition cap rate increase in its 2013-2014 and 2014-2015 financial planning, which is likely to result in a continuation of solid operating performance based on actual enrolment trends. The University is in the process of implementing a new modified activity-based budget model to help align operations with broader objectives and cost incentives, and is undertaking a long-term capital planning and prioritization exercise to address capacity issues.

McMaster faces a number of challenges, including a significant deferred maintenance backlog, estimated at $150 million, and sizeable unfunded pension liabilities. A funding strategy is being implemented to increase expenditures on deferred maintenance by $45 million over five years, largely focusing on critical repairs, but this still leaves a significant structural backlog of deferred maintenance unaddressed. With respect to unfunded pension obligations, the University is required to make annual going concern deficit payments of $20.8 million until the next valuation in 2014. McMaster has qualified for Stage 1 of the Province’s solvency relief program, allowing the University to defer solvency payments and extend the subsequent amortization period for funding the deficits to ten years from the normal five. DBRS notes that significant changes to employee contributions and plan design place McMaster ahead of many of its peers in addressing the long-term sustainability of its pension plans.

In 2011-2012, McMaster’s total debt fell to $139.4 million, or approximately $5,375 per FTE. Debt is not expected to have changed materially in 2012-2013 beyond scheduled amortization although, as noted for some time by DBRS, the University is considering the possibility of adding up to $100 million in new debt to finance capital projects. Plans are now in more advanced stages, with an emphasis being placed on projects that would be largely self-supporting in nature. DBRS expects the proposed debt increase would result in debt-per-FTE of approximately $8,600, and reduce the interest coverage ratio to the 4.0 to 5.0 times range, provided a balanced operating position is maintained. DBRS views this as manageable for the current rating. The University’s conservative financial approach, emphasis on revenue-generating projects and the need for additional capacity are noted by DBRS as mitigating factors of this reduced flexibility.

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.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com