DBRS Confirms the University of Ontario Institute of Technology at BBB (high), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Series A Senior Unsecured Debentures (the Debentures) rating of the University of the Ontario Institute of Technology (UOIT or the University) at BBB (high) with Stable trends. UOIT’s credit profile is supported by the University’s improving academic reputation, sound operating performance in recent years and robust enrolment growth since inception. The ratings are constrained by UOIT’s relatively high debt burden, a tight operating environment and an unfavourable demographic outlook for the university-age population that has caused enrolment at the University to contract for the first time.

Operating performance in 2014-2015 remained sound, with UOIT posting a fifth consecutive surplus of $8.7 million, down slightly from the prior year. Revenues advanced by a modest 2.6%, supported by higher student tuition fee revenue, modest enrolment growth of 2.0% year over year (YOY) and increased government accessibility grants. Expense growth outpaced revenues at 4.6% YOY, driven by an $8.1 million increase in salary and benefit costs associated with the hiring of new professors. In 2015-2016, UOIT’s balanced budget planned for full-time-equivalent (FTE) enrolment growth of 1.7%. At mid-year, a decline of 1.5% in enrolment has resulted in a nearly $2.0 million hit to grant revenues and $1.6 million in lower net tuition receipts. Offsetting these losses are savings associated with fewer students, vacant staff positions and the release of $3.2 million in contingency reserves for a total positive expense variance of $11.5 million. On a net basis, UOIT expects to record a consolidated accrual surplus of $2.5 million at year end. Over the next three years, the University projects that enrolment and revenues will remain flat before the demographic outlook improves, necessitating an across-the-board budget cut of 2.5% in 2016-2017 and 2017-2018. UOIT plans to fluctuate between modest deficits and surpluses before achieving a net balanced position at the end of the five-year budget horizon.

The University’s total debt declined by 3.7% to $241.6 million or $27,618 per FTE student as of March 31, 2015, the highest debt burden among DBRS-rated universities despite a steady decline in recent years. DBRS also notes that UOIT benefits from a provincial Debenture Grant, appropriated annually, that provides funding for 82% of principal and interest costs for the term of the Debentures. The University is not permitted to borrow until 2017 under the terms of a loan agreement with the Ontario Financing Authority. While no new borrowing is currently planned, major capital projects under consideration could entail financing needs in the medium term, depending on funding arrangements yet to be formalized with the provincial and federal governments.

Further improvement in financial flexibility from a steadily declining debt burden and an increase in expendable resources, combined with stabilized enrolment and the continued strengthening of UOIT’s academic profile, would likely exert upward pressure on ratings. Ratings could move downward if UOIT experiences a notable deterioration in operating performance, significant enrolment losses, an erosion in expendable resources or a material increase in actual or planned external borrowing.

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 methodologies are Rating Public Universities and DBRS Criteria: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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