DBRS Confirms McMaster University AA (low) and Assigns Provisional Rating on Debentures Issue

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of McMaster University (McMaster or the University) at AA (low) with Stable trends. At the same time, DBRS has assigned a provisional rating of AA (low) with a Stable trend to the proposed Series A Senior Unsecured Debentures (Series A Debentures) to be issued by the University in a principal amount up to $120 million.

The ratings and trends are reflective of a high level of expendable resources, a track record of prudent financial management and a strong academic profile and favourable catchment area that should help to offset broader enrolment challenges associated with a weak demographic outlook. The University has taken steps to address financial risks, including the significant special payment cash requirements associated with employee pension and non-pension benefits that must be funded by operating units out of existing allocations, in addition to normal current service costs and baseline inflation for negotiated compensation increases. Funding strategies have been implemented to smooth the costs of these obligations over time, and the new modified activities budget model is facilitating greater transparency and driving further efficiencies.

The new long-term Series A Debentures will be senior obligations of the University and will rank pari passu with all of its other present and future unsecured and unsubordinated obligations. DBRS understands that net proceeds of the issuance will be used to replenish cash resources used to internally finance approved capital projects such as the Living-Learning Centre and to fund future capital needs, including a proposed graduate student residence. DBRS expects that by issuing the new long-term debt, McMaster’s leverage will peak this fiscal year at just over $9,000 per full-time equivalent student (FTE), up from $4,872 in 2014–2015, before receding thereafter. This higher level of debt was anticipated for some time and is deemed manageable for the ratings. Interest coverage remains robust at 14.5 times, among the highest of rated institutions, and interest charges as a share of expenditures are low at less than 1.0%. On a pro forma basis with the additional long-term debt, interest coverage is expected to remain solid and interest charges manageable as a share of overall expenditure over the medium term.

Operating performance in 2014–2015 was solid, with the University reporting a consolidated surplus of $78.6 million, down slightly from a restated surplus of $86.6 million the prior year; however, DBRS notes that the transition to new accounting standards for employee future benefits somewhat overstates the financial strength of the University, as reaching a balanced position on a cash-budget basis remains challenging, with some faculties experiencing structural deficits. One-time and strategic spending is also pressuring the operating envelope and necessitating drawdowns of prior appropriated surpluses. In 2015–2016, McMaster projects a cash operating deficit of $12.7 million and a consolidated surplus of $54.3 million, with revenue gains of 1.8% supported by projected FTE enrolment growth of 1.0% and maximum fee increases under the provincial framework, while government funding remains flat following two years of base grant cuts. Spending growth will outpace revenues at 4.6% year over year, driven primarily by higher labour costs and increases for utilities, maintenance, renovations and equipment.

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.