DBRS Confirms University of Ontario Institute of Technology at BBB (high) with Stable Trends

DBRS has today confirmed both the Issuer Rating and the Series A Senior Unsecured Debentures rating of the University of Ontario Institute of Technology (UOIT or the University) at BBB (high) with Stable trends. The ratings are supported by UOIT’s fairly stable revenue base, improved financial performance in recent years, and steady enrolment growth as the University continues to build its reputation. However, the ratings are constrained by a relatively high debt burden and tight operating environment.

UOIT posted a fourth consecutive surplus of $11.3 million, or 6.0% of revenues in 2013–14. Operating pressures associated with enrolment growth drove expenses up by 9.7%, outpacing the 7.0% rise in revenues. Enrolment came in below expectations but still grew by a healthy 4.0% in 2013–14. A balanced budget was presented for 2014–15, with both operating revenues and spending projected to grow by 7.6%. The University was forced to absorb a second $500,000 cut to its provincial operating grant, but increased graduate student grants are expected to provide an offset and lead to a modest increase in overall grant funding. Tuition receipts will once again drive revenues higher, supported by enrolment growth and an average tuition fee increase of 2.9%. Labour-related expenses continue to be the primary operating pressure, and after leaving some positions vacant in 2013–14, hiring is expected to pick up again in 2014–15. Going forward, management will have to contend with growing demographic headwinds, as Ontario’s university-aged population has reached a plateau, as well as constrained government funding, which could hamper revenue growth. Additionally, physical space constraints remain a concern.

Total debt fell by 3.8% to $250.8 million or $29,531 per full-time equivalent (FTE) as of March 31, 2014, down from $31,920 per FTE the previous year. Despite the continued improvement, UOIT’s debt burden remains high relative to other DBRS-rated universities, by a wide margin. Likewise, interest charges accounted for a sizeable 9.3% of total spending, while the interest coverage ratio was flat at 2.6 times (x) in 2013–14. Under the terms of a $28 million loan agreement from the Ontario Financing Authority, no additional indebtedness or capital leases are permitted until the loan has been repaid, which is expected by October 2017. As such, DBRS expects debt to gradually decline over the medium term, with the amortization of the Debentures and other loans. Since the completion of several large capital projects in recent years, capital spending has been limited to equipment acquisitions, routine maintenance and upgrades of IT infrastructure. The University is currently working on a joint Campus Master Plan (CMP) with Durham College. Phase 1 was completed in February 2014, and consisted of site observations, preliminary campus design and space analysis. Phase 2 is expected to be completed in late Fall 2014, which will include a detailed concept plan and provide further details on the implementation strategy. DBRS notes that given UOIT’s limited financial flexibility, the CMP could eventually require additional debt needs, though the full scale, affordability and potential level of government support required are all currently uncertain.

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 methodologies are Rating Public Universities and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

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