DBRS Confirms McMaster University at AA (low)

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of McMaster University (McMaster or the University) at AA (low) with Stable trends, reflecting the institution’s solid academic profile, high level of expendable resources and track record of prudent financial management. Although DBRS remains concerned about large and growing pension and post-employment benefit obligations, the University has taken a number of proactive steps in addressing funding deficiencies. Cost containment efforts have yielded positive results in recent years, with total expenditures growing by just 0.8% in 2012-2013. Revenues expanded by 6.6% in the same year, producing a consolidated surplus of $60.7 million; however, this was largely driven by strong capital market performance, leading to high investment returns. Financial results for the most recent fiscal year are not yet available, but DBRS expects another relatively strong surplus based on projections.

Like all Ontario universities, McMaster enjoys limited fee-setting autonomy under the Province’s recently updated tuition framework that holds average tuition rate increases to 3%, and has been required to absorb cuts to operating and other grants beginning in 2013-2014. Although recent budgets have been structurally balanced before one-time costs, the University has relied on prior appropriated surpluses to fund a number of strategic investments, a strategy that is likely to prove unsustainable over the long term. Rising pension and post-employment unfunded liabilities are also generating significant cash requirements that must be funded by individual operating units out of existing allocations, in addition to normal current service costs and baseline inflation from negotiated salary increases. While this is a significant pressure for the University, a long-term funding strategy has been put in place to meet the annual pension payment requirements.

Cost containment efforts have proved successful in holding down expenditure growth in recent years, despite these inflationary pressures. The full implementation of a new modified activities-based budget model in 2014-2015 should further strengthen internal financial incentives, drive new efficiencies and better align the strategic objectives of the University with the activities of operating units based on actual enrolment and other drivers.

As noted for some time by DBRS, the University is considering adding up to $120 million in new long-term financing to fund capital expansion and new campus capacity. Projects under consideration could generate ancillary revenues that would self-support higher interest charges and expand revenue potential through higher enrolment, such as a proposed mixed-use Living Learning Centre. Should McMaster proceed with this new borrowing, DBRS expects debt per full-time equivalent student to peak at nearly $9,400 in 2015-2016, while interest coverage would likely erode to the 4.0 to 5.0 times range, both of which are viewed as manageable for the rating, given McMaster’s considerable base of expendable resources and need for new campus capacity. However, this higher leverage would likely exhaust much of the remaining room within the current rating.

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.

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

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.