DBRS Confirms the University of Toronto at AA, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debentures rating of the University of Toronto (the University or U of T) at AA. Both trends are Stable. The ratings reflect U of T’s exceptional academic profile, robust enrolment outlook, effective financial management practices and positive operating results; however, the University’s ratings are constrained by its significant pension and employee future benefits liabilities and its relatively high level of deferred and pending maintenance. In addition, there remains some policy uncertainty surrounding the Province of Ontario’s (the Province; rated AA (low) by DBRS) funding and tuition frameworks.

The University posted a strong operating result in 2015–16, achieving a surplus of $210.6 million. The result was weaker than in previous years, though this was largely the result of weaker investment earnings. Enrolment increased strongly during the year (+3.5%), which drove tuition revenue higher and helped to offset flat operating grants and weak investment earnings. At the same time, expense growth increased as a number of divisions sought to increase spending on academic and other priorities. Notwithstanding these increases, divisions’ operating fund reserves have continued to rise, reflecting U of T’s considerable financial flexibility.

The University has tabled a balanced budget for the 2016–17 fiscal year and the outlook for subsequent years is positive. While Ontario’s university sector is facing enrolment and funding-related challenges, U of T remains the Province’s preeminent institution. The University continues to attract considerable amounts of research funding, student demand remains strong and donations from its large and generous base of alumni and friends continue to rise. As such, DBRS believes that the University has ample financial flexibility to meet its evolving academic priorities and inflationary pressures.

The University continues to make significant investments in capital renewal and expansion across its three campuses; however, the strength of U of T’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, DBRS expects the debt burden per full-time equivalent, currently $9,317, to track lower as enrolment rises.

DBRS expects the ratings to remain stable over the medium term. A positive rating action, though unlikely, requires a significant improvement in the funding environment and an upgrade of the Provincial funder rating. A negative rating action, similarly unlikely, requires a significant and sustained deterioration in operating results and a marked deterioration in the University’s balance sheet.

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

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.