DBRS Confirms Rating of University of Toronto at AA, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of the University of Toronto (the University or UofT) at AA, both with Stable trends. UofT benefits from a track record of sound financial management and an excellent academic profile which have driven healthy growth in both enrolment and endowment assets, leaving the University well placed within the current rating.

UofT recorded an improved consolidated surplus of $204.3 million or 7.5% of revenues in 2013-2014. Revenues rose by 5.7%, spurred by strong investment returns, and a 2.9% increase in full-time equivalent (FTE) students which lifted tuition and other ancillary revenues. Expenditure growth was contained to 3.3% in 2013-2014 as a result of prudent and deliberate spending restraint across most faculties and divisions. Total debt declined slightly to $722.8 million and, when combined with enrolment growth, reduced debt per FTE to $9,988 per FTE as of April 30, 2014, from $10,326 per FTE in the prior year. Expendable resources rose to $1.1 billion or 146% of debt outstanding, providing a considerable financial cushion, and the interest coverage ratio stood at a solid 5.6 times.

A balanced operating budget was approved for 2014-2015 and preliminary indications suggest that the University is on track to post another surplus for the current fiscal year, supported by better-than-expected investment returns and departmental underspending. The medium-term outlook points to continued balanced results, though ongoing pressures will make this challenging. UofT continues to grapple with sizable cash outlays related to unfunded pension liabilities. Encouragingly, recent actuarial valuations as of July 1, 2014, showed signs of improvement in the financial position of the plans, owing to strong investment performance and implementation of the pension contribution strategy, which more than offset growth in pension liabilities. Furthermore the University was recently approved for Stage 2 of the provincial solvency relief program. The University plans to revisit its pension contribution strategy later this year, but in the meantime has increased the pension special payment budget to $112.2 million per annum between 2016-2017 and 2018-2019. Such large cash draws continue to consume resources that would otherwise be used to further support the academic mission.

UofT has a number of large capital projects currently underway and others are in the early development stages. The University continues to utilize a “build to budget” approach, which calls for faculties to develop funded capital plans, utilize internal reserves and secure fundraising in order to reduce the debt needs associated with proposed projects. While the University does not plan to add new external financing over the near term, its internal debt policy gives it room to do so; however, given the tight budget position, slowing government funding and potential demographic headwinds, DBRS believes that the University’s debt appetite will have to be tempered to prevent erosion in the credit profile.

Notes:
All figures are in Canadian 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.