DBRS Downgrades the University of Ottawa to AA (low) and Assigns a Provisional Rating to Series B Debentures; Trends Stable

DBRS Limited (DBRS) has today downgraded the University of Ottawa’s (the University) Issuer Rating and Senior Unsecured Debt rating to AA (low) from AA. The trend on both ratings is Stable. DBRS is also assigning a provisional rating of AA (low) with a Stable trend to the proposed Series B Senior Unsecured Debentures (Series B Debentures) of up to $200 million.

The downgrade reflects the expected increase in the University’s debt burden. The debt burden will rise to an estimated $7,900 per full-time equivalent (FTE) in 2016–17 from $3,679 per FTE in 2015–16. At the same time, the ratio of expendable resources-to-debt is projected to fall to about 0.90 times (x) from 1.75 x. With a forecast for stable enrolment and tight operating results, the credit metrics are expected to remain relatively stable over the medium term. As such, the credit profile is now more consistent with a AA (low) rating, the same as its provincial funder, the Province of Ontario (rated AA (low) with Stable trend by DBRS).

The University intends to the use the proceeds of the issuance to support an expanded capital program. DBRS expects the capital projects will support the University in reaching its long-term strategic goals of enhancing its research excellence, the student experience and, ultimately, the University’s academic profile.

The University of Ottawa’s credit profile continues to benefit from the University’s strong academic profile as a leading research-intensive university. The University’s enrolment is expected to remain relatively stable over the medium term at a time when a number of Ontario universities are struggling with declining enrolment. In recent years, the University of Ottawa has intentionally limited enrolment growth to improve the calibre of its students and the student experience. The stable enrolment outlook is largely a function of the University’s favourable location and catchment area, and its unique status as Canada’s only bilingual university, which tends to result in relatively stable demand. The University has also been successful in offsetting declines in domestic undergraduate enrolment caused by underlying demographic weakness with increased international enrolment.

The stable enrolment outlook and the nature of the provincial tuition fee and funding framework will limit revenue growth; however, the University has demonstrated a history of prudent and responsive financial management. The University has commenced a number of initiatives aimed at addressing the budget challenges that have emerged because of slower revenue growth and shifts in program demand. DBRS expects the University will be successful in achieving balanced operating results over the medium term and ultimately restoring flexibility in its credit profile.

The new Series B Debentures will be direct senior unsecured obligations of the University and will rank equally with all of the University’s other senior unsecured obligations. The assignment of a final rating for the Series B Debentures is subject to receipt by DBRS of final documentation that is consistent with that which DBRS has already received.

RATING DRIVERS
DBRS expects the ratings to remain stable over the medium term. The ratings could come under downward pressure if enrolment were to decline sharply or if changes to the operating framework lead to a significant deterioration in operating results. Over the longer term, further improvement in the University’s academic profile and increased balance sheet flexibility, including a lower debt burden as measured by DBRS, could result in upward rating pressure.

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.

The rated entity did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.