DBRS Confirms University of Ottawa at AA, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of the University of Ottawa (uOttawa or the University) at AA, both with Stable trends. The rating confirmation and trends reflect uOttawa’s strong academic profile, track record of prudent financial management, solid balance sheet and low debt burden. However, as demographics shift toward fewer domestic university-age students, overall enrolment is expected to flatten or decline, and reliance on international students is set to rise. Combined with constrained funding and escalating salary and benefit costs, the University will need to continue to realign and rationalize its operations to eliminate structural deficits and asset drawdowns within certain faculties, particularly those experiencing more pronounced enrolment challenges.

In 2014–2015, enrolment slowed to a year-over-year increase of just 1.0%, with further cuts to operating grants exacerbating the budget situation. The original budget indicated a deficit of $41.2 million; however, the University reported a consolidated surplus of $62.8 million on an accounting basis as a result of in-year savings and significantly lower pension costs from the adoption of updated accounting standards. On a cash basis, the operating fund ended in a surplus of $2.6 million. DBRS notes that significant challenges remain in producing a balanced result on a cash basis within the operating fund. In 2015–2016, the University is budgeting for a significant shortfall of revenues to expenses of nearly $54 million amid a projected decline in enrolment of 0.9%, offset by a drawdown of accumulated net assets, while on an accounting basis it currently projects a surplus of $13.3 million.

Long-term debt declined modestly in 2014–2015 to $170.7 million or $3,677 per full-time equivalent (FTE) student, the lowest among DBRS-rated universities, with interest charges remaining affordable at 1.3% of total revenues. Interest coverage improved and remains very solid at 8.4 times. The capital program includes two flagship projects that are likely to result in additional long-term borrowing over the medium term: an $83 million Learning Centre project set to open in 2017 and the eventual $80 million consolidation of the Faculty of Health Sciences into one facility. New borrowing for capital projects has been limited by the Board of Governors at $120 million, likely to take place in 2017–2018, resulting in a peak debt burden of approximately $6,100 per FTE student the same year, a manageable level for the rating.

In a period of declining domestic enrolment, a mix of further cost containment and efficiency savings, including potential program rationalization, as well as diversification of revenue sources away from enrolment-linked sources, will be challenging but necessary undertakings to ensure long-term financial sustainability. Despite the low current debt burden, additional leverage and carrying costs for capital investment will need to be carefully balanced in this context to avoid erosion in the credit profile.

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 2015), which can be found on our website under Methodologies.