DBRS Confirms York University at AA (low)

DBRS Limited (DBRS) has today confirmed both the Issuer Rating and the Senior Unsecured Debentures rating of York University (York or the University) at AA (low) with Stable trends. The ratings are supported by York’s sound academic profile, track record of conservative financial management, sizable base of expendable resources and improving operating performance. However, recent domestic enrolment weakness, a constrained funding environment and persistent spending pressures have created a significant structural deficit.

The University reported a consolidated operating surplus of $4.4 million in 2013–2014, an improvement from the deficit of $2.8 million reported for 2013, which was restated from a significant surplus after the adoption of updated accounting standards. Revenues grew by 3.4% year over year, supported by tuition fee rate increases and strong investment returns, and were partially offset by cuts in provincial operating grants. Expense growth of 2.7% was driven primarily by rising compensation costs and higher general administrative expenses, despite ongoing cost containment efforts, including a 3.5% baseline budget cut for academic and service units.

Following the issuance of a $100 million debenture in February 2014, York’s long-term debt rose to $405.2 million, or $8,404 per full-time equivalent (FTE) student, as of April 30, 2014. This level is slightly above expectations at the time of last year’s review, owing to a 1.6% decline in FTE enrolment, but remains acceptable for the rating. Debt per FTE could peak at nearly $8,500 in 2015–2016, based on expectations of a further modest decline in enrolment, while interest coverage could potentially fall below 2.0 times before improving in line with stronger surpluses in the latter years of the multi-year budget.

Encouragingly, strong investment returns on plan assets, higher contribution rates and plan assumption changes contributed to the improvement in the funded status of York’s post-employment pension and benefit obligations. The resulting improvement in actuarial valuations and subsequent approval for provincial Stage II solvency relief have significantly reduced special pension payments.

The 2014–2015 budget projects an operating fund deficit of $8.8 million before returning to a surplus position in 2015–2016. Pension and benefit savings against the original budget plan have prudently been directed towards a new contingency reserve for future potential pension costs as well as toward smoothing the impact of strategic initiatives such as the transition to a new budget model and the implementation of recommendations from an ongoing academic and administration program review. These exercises are aimed at restoring structural operating balance by streamlining services and could include rationalizing academic offerings. However, DBRS expects that the operating environment will remain constrained by funding cuts and weaker enrolment trends. While capital spending plans remain modest and debt needs minimal, given the recent issuance, any significant new borrowing for capital over the medium and long term could place downward pressure on ratings.

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.