DBRS Upgrades the University of Ontario Institute of Technology (UOIT) to A (low), Trends Stable

DBRS Limited (DBRS) has today upgraded the University of Ontario Institute of Technology’s (UOIT or the University) Issuer Rating and Series A Senior Unsecured Debentures rating to A (low) from BBB (high). Both trends are Stable. The upgrade reflects the ongoing improvement in the University’s academic profile and financial management practices, which has translated into sustained operating surpluses and greater balance sheet flexibility. DBRS has assessed that this improvement over a number of years has been sufficient to warrant an upgrade.

The University reported a positive operating result for the 2015-2016 fiscal year, which marked the sixth year of positive operating results following chronic shortfalls in its earlier years when it was rapidly growing. The positive operating results reflect both the achievement of scale, as well as sustained efforts to improve financial management practices. Through this period, the University has significantly reduced debt and increased balance sheet flexibility.

The University prepared a balanced budget for 2016-2017, and since that time, the outlook has improved. Enrolment did not fall as expected, and the University received significant new capital funding for a major research facility and highly specialized equipment for its Automotive Centre for Excellence. With cost reduction initiatives and the use of contingencies, the University is now projecting a modest surplus of $2.8 million.

Over the medium term, the outlook for the University remains challenging amid stable enrolment, limited revenue growth and the ongoing cost pressures from a labour-heavy cost base. Nevertheless, DBRS expects the University to post stable and roughly balanced operating results over the medium term. The University has introduced measures to limit expense growth and provided faculties with greater control over budgets to implement necessary reforms.

The University’s debt burden remains the highest among Ontario universities at $26,734 per full-time equivalent student (FTE), though the circumstances around the University’s debt burden remain unique in the Ontario context. The Province supports a large share of UOIT’s annual debt servicing costs through restricted debt servicing grants. While the legal obligation rests with the University, this arrangement effectively results in the University’s servicing only a third of its debt from its general operations (i.e., unrestricted operating grants, tuition revenue, etc.). UOIT’s debt burden will remain elevated over the medium term but is tracking lower, as much of the debt is amortizing. The University does not intend to issue new debt in the near term. As such, DBRS expects the University’s debt burden to decline to about $23,000 per FTE over the next three years. The unique debt servicing arrangement was not a catalyst for the upgrade, though DBRS notes that a material reduction in the restricted grant, though not expected, would put downward pressure on the rating.

DBRS expects the ratings to remain stable over the medium term. A positive rating action would likely require further debt reduction and greater balance sheet flexibility. A negative rating action, though unlikely, would require a significant and sustained deterioration in operating results.

Notes:
All figures are in Canadian 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 principal 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 access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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