DBRS Upgrades University of Guelph to A (high)

DBRS Limited (DBRS) has today upgraded the University of Guelph’s (Guelph or the University) Issuer Rating and Senior Unsecured Debt rating to A (high) from “A” and changed the trend to Stable from Positive. The upgrade reflects a sustained improvement in operating results, greater financial flexibility and an improved outlook for the University’s pension plan.

Over the last five years, the University adopted a series of budget measures to address a structural deficit that emerged amid slowing growth in enrolment and provincial funding. These measures and ongoing enrolment growth have successfully addressed the structural deficit and led to annual surpluses ranging between $45 million and $75 million in recent years.

The measures to address the budget deficit have also led to meaningful improvement in the University’s balance sheet. Guelph’s internally restricted net assets and endowments have risen strongly along with positive operating results and investment returns, while debt growth has been limited. This provides the University with considerable flexibility to address funding and enrolment uncertainty over the medium term. DBRS estimates that the University’s expendable resources have risen to 182.4% of debt from 93.8% five years earlier, which is high among DBRS-rated universities.

The University’s pension and post-retirement benefits continue to be a challenge; however, the outlook has improved since the time of the last review, which was a factor in the upgrade. The University’s pension plan is underfunded and the solvency deficit rose to about $600 million as at August 1, 2016. Nevertheless, the outlook for the funding status and special payment has improved. Since August’s valuation, interest rates have risen and the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS) has extended temporary solvency relief measures. The requirements for special solvency payments have been sharply reduced. DBRS believes that further accommodation or changes to solvency funding requirements could be forthcoming, as the Province is reviewing solvency funding requirements for both public and private sector plans.

Since the time of the last review, the outlook for the operating environment has also improved. The Province has extended the tuition fee framework for an additional two years and provided guidance for the next round of Strategic Mandate Agreements and the funding formula. While funding will remain constrained, the Province continues to make post-secondary education a priority. Because of the budget measures adopted by the University and its cautious approach to budgeting, DBRS expects the University to report positive operating results in the coming years.

The outlook for the University’s debt burden continues to track prior expectations, wherein the University’s debt per full-time equivalent (FTE) was expected to rise in 2016–2017 before gradually falling in subsequent years. With the increase in enrolment, DBRS now expects the debt burden per FTE to peak at $10,800 in 2016–2017 before declining to $9,900 in 2018–2019.

DBRS expects the rating to remain stable over the medium term. DBRS does not expect a change in business risk factors; therefore, a rating action, if any, would likely be the result of changes in financial factors. A positive rating action would require a reduction in debt and further improvement in the outlook for the University’s employee future benefits. A negative rating action, though unexpected, could result if there is a sustained deterioration in operating results and an increase in debt.

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 principal methodology is Rating Public Universities, which can be found on dbrs.com 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.