DBRS Confirms Queen's University at AA

DBRS Limited (DBRS) has confirmed the Issuer Rating and Senior Unsecured Debt rating of Queen's University (Queen's or the University) at AA with Stable trends. The ratings are supported by the University's strong academic profile, sizable endowment assets and improved operating performance. The implementation of an activities-based budget model has reinforced spending discipline, although operating pressures such as pension cash funding requirements could rise notably in upcoming years, restricting flexibility. DBRS also expects that the operating environment will remain constrained by falling government funding and demographic headwinds.

For 2013–2014, Queen's reported a healthy consolidated operating surplus of $45.6 million, up from $22.6 million the prior year. The surpluses of the last two fiscal years are primarily a result of elevated investment income from strong capital markets performance and ongoing cost-containment efforts. Revenues grew by 4.5% in 2013–2014, supported by higher grants and tuition fees from 2.1% full-time equivalent (FTE) enrolment growth. Donation revenues were also up notably year over year (YOY). Expense growth was modest at 1.7%, as the University held growth in salary and benefits to just 0.2% for the year. The operating environment, however, remains constrained by operating grant cuts and limited tuition fee-setting autonomy. The University forecasts that the operating budget will remain balanced through 2016–2017, with minimal drawdowns of internal reserves based on enrolment growth of 4.8% and 3.3% in fiscal 2015 and 2016, respectively, as Queen's solid academic profile and robust student demand afford greater resilience to softer-than-expected system enrolment.

At $34,963 per student, Queen's has the largest endowment per FTE among DBRS-rated universities, providing considerable credit support. Total endowment assets grew by 12.7% to $800.2 million in 2013–2014, again driven by strong capital market returns. Expendable resources remain a credit strength at approximately $426.0 million or 186% of total debt, consisting of internally-restricted endowments and unrestricted reserves. Interest coverage was up slightly for the year and remained solid at 4.2 times in 2013–2014.

For greater consistency across the sector, DBRS now presents Queen's FTE enrolment figures based on a calculation of student standard credit loads rather than a previous Statistics Canada calculation formula. This has resulted in a one-time downward adjustment in Queen's debt burden to $9,997 from $10,460 per FTE. On a YOY basis, debt-per-FTE declined to $9,997 from $10,048 in 2012–2013, owing to enrolment gains and modest debt growth. Further draws on the bank facility for residence construction will likely push leverage to a peak just below $11,500 in 2015–2016, although this is deemed to be manageable given the revenue-generating nature of the assets. While the residences will expand capacity and enrolment potential, the moderately higher leverage will exhaust much of the remaining flexibility in the credit profile, especially in conjunction with rising pension requirements or a deterioration in operating performance.

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.

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

The applicable methodology is Rating Public Universities (June 2014), which can be found on our website under Methodologies.