DBRS Downgrades Wilfrid Laurier University to A (low), Trends Stable

DBRS has today downgraded both the Issuer Rating and Senior Unsecured Debt rating of Wilfrid Laurier University (Laurier or the University) to A (low). The trend on both ratings has been restored to Stable. Debt has remained above the range deemed acceptable by DBRS for an “A” rating longer than anticipated owing to capital needs and continued delays in carving out certain real estate assets acquired in 2012, and related debt, into a separate trust. When combined with sizeable pension deficiencies, a challenging operating environment and the potential for additional debt needs over the medium term, this results in a credit profile more consistent with an A (low) rating.

It was originally anticipated that Laurier would use an arm’s-length trust structure to hold the recently acquired real estate assets and related debt, which would be non-recourse to the University. Although the initiative is still being considered, the fact that the trust structure has yet to be implemented over the last two years leads DBRS to question the likelihood that it will proceed, raising the possibility of debt remaining at elevated levels for an extended period. For the year ended April 30, 2014, debt was estimated at $206.4 million, up by 7.8% year over year. Although this increase was relatively modest, total debt has grown by more than 75% since 2010–2011, prior to the Negative trend being assigned, and equates to debt per full-time equivalent (FTE) of approximately $12,100 — the second-highest debt burden among DBRS-rated universities. In addition, without accounting for the potential development of a new campus in Milton, Ontario, the capital plan has increased notably (including conceptual projects not yet approved) and DBRS believes it may require additional upfront borrowing until all funding sources are identified. Based on Laurier’s already planned borrowing, debt is expected to reach $13,500 per FTE by 2014–2015, but could rise further based on the above-noted concerns.

From an operating perspective, Laurier reported a consolidated deficit of $29.2 million in 2012–2013 based on new accounting standards for not-for-profit organizations. However, DBRS excludes gains and losses from the remeasurement of pension and benefit obligations, which results in an adjusted surplus of $21.6 million, or 6.8% of revenues. For 2013–2014, the budget pointed to a small operating surplus, although this required the use of prior year reserves to avoid a projected deficit. Despite enrolment growth falling somewhat short of expectations, recent indications suggest that operating results remained on track, owing to departmental underspending. Based on Laurier’s three-year operating budget, the University continues to face a structural deficit through 2015–2016, which will require corrective measures if balance is to be restored and to eliminate the practice of relying on past surpluses to offset shortfalls. Revenue growth is expected to remain constrained by the current tuition framework, ongoing fiscal restraint at the provincial level and an increasingly competitive student recruitment environment as the university-aged population in Ontario has reached a plateau. Laurier will need to maintain disciplined expenditure management going forward as agreements with faculty and support staff come up for renewal and pension funding requirements are likely to increase notably in the coming years. Of note, management indicates that the recent real estate acquisition should be modestly positive for operations and is strategically located next to the main campus, helping to expand the University’s footprint.

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

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.