DBRS Confirms University of Toronto at AA

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of the University of Toronto (the University) at AA, both with Stable trends. The ratings reflect the University’s internationally prominent academic profile, robust enrolment outlook, effective financial management practices and positive operating results.

The University expects to generate another consolidated surplus in 2015–16, though not to the same scale as in recent years because of weaker investment returns. Notwithstanding the volatility in investment earnings, the interim results are positive, with enrolment significantly stronger than expected. Enrolment growth of 3.5% was driven by a higher than anticipated acceptance rate and not looser entrance standards. Revenue growth is projected at 2.3%, while expense growth is projected at 8.4%, resulting in a narrower consolidated surplus. Expense growth is broad-based, with most expenditure categories projected higher.

The medium-term outlook remains challenging under the current tuition and funding frameworks, with the university expecting operating revenue growth to lag expenditure growth in the coming years. Moreover, the University’s pension plans continue to be challenged by the persistence of low interest rates, with the solvency deficit widening to $1.1 billion at July 1, 2015. Without further solvency accommodation by the province or an improvement in long-term interest rates, pension plan deficit payments will put further pressure on the University’s cash flow in an already constrained environment.

The University continues to make significant investments in capital renewal and expansion across its three campuses; however, the strength of the University’s balance sheet and its effective approach to capital budgeting are expected to limit the need for new borrowings. The University does not plan to issue any external debt in the near term. As such, the debt burden per FTE should track meaningfully lower as enrolment continues to rise.

There is policy uncertainty facing the university sector, with the provincial funding framework currently under review, the tuition framework set to expire after 2016–17 and temporary solvency relief set to expire in the years after. DBRS expects the provincial government will continue to be supportive of post-secondary education and that any changes will not adversely impact university funding. Similarly, DBRS expects the provincial government will continue to accommodate pension solvency deficits in the sector, given (1) the impact that a significant increase in pension payments would have on university budgets and programming, (2) ongoing progress by Universities to improve the sustainability of their defined benefit pension plans and (3) sector-wide progress on discussions about the establishment of a multi-employer jointly sponsored pension plan.

Overall, DBRS expects the University’s credit profile to remain relatively stable over the coming years, though a significant deterioration in operating performance or a significant increase in external debt could put downward pressure on the rating.

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.

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

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

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