DBRS Assigns Ratings of “A,” Stable Trends, to Trent University

DBRS Limited (DBRS) has today assigned an Issuer Rating of “A” with a Stable trend to Trent University (Trent or the University). DBRS has also assigned a provisional rating of “A” to Trent’s proposed Senior Unsecured Series A Debentures (Series A Debentures). The ratings are supported by the University’s academic profile and importance as a regional university in Ontario, a moderate debt burden, a high level of funding support from the Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS) and Trent’s record of responsible financial management. The ratings are constrained by the challenging operating framework for Ontario universities, the University’s smaller size and local catchment area, material employee future benefit liabilities and a relatively low level of expendable resources.

The Stable trend reflects DBRS’s view that Trent is well positioned to grow enrolment based on its reputation as an important, primarily undergraduate and liberal arts institution in Canada. DBRS expects that the University’s enrolment will contribute to maintaining a manageable and declining debt burden following the proposed issuance for refinancing existing loans and new capital priorities. This includes a major retrofit of two floors of the library to house the new Bata Research and Innovation Cluster funded in part through federal and provincial funding.

In 2015-16, Trent recorded a consolidated operating surplus of $10.6 million or 6.8% as a share of revenues. The 2016-17 budget projects an operating fund surplus of $1.3 million. Higher grant and tuition-fee revenues are supported by a budgeted enrolment increase of 322 full-time equivalents (FTEs) or 4.2%. DBRS notes that the University is tracking an increase that is nearly double this projection, which should provide considerable upside to operating results, assuming that spending evolves as planned.

The new Series A Debentures will be direct senior unsecured obligations of the University and will rank equally with all of Trent’s other unsecured obligations. The University intends to use the proceeds of the proposed issuance for refinancing a portfolio of amortizing loans and for contributions to new capital projects. Following the proposed issuance, the resulting pro forma debt burden of $71.1 million translates to $8,798 per FTE student in 2016-17, up from $7,097 per FTE student as of April 30, 2016; this is low compared with peers at a similar rating level. Trent’s expendable-resources-to debt stood at 23.8% at YE2015-16, up from 5.2% in 2014-15. This ratio is expected to decline in 2016-17 as the University’s debt burden rises moderately following the issuance.

DBRS expects that the operating environment for Ontario universities will remain challenging over the medium term, although the outlook has improved somewhat in recent months. The Province recently extended temporary solvency relief, the tuition-fee framework (for two years) and is initiating negotiations on a second round of Strategic Mandate Agreements (SMA) in conjunction with a review of the funding formula. Initial indications suggest the Province may move to stable funding for each university within a set enrolment range (corridor), which would reduce revenue volatility for universities and reduce the risk of funding reductions during periods of weakening enrolment. DBRS expects that the next round of SMAs will be more specific and targeted and that some portion of university funding will be “at-risk” if specific objectives or targets are not met, although DBRS expects outcome-oriented funding to remain a relatively small share of total funding.

RATING DRIVERS
The outlook on the Issuer Rating and Series A Debentures rating are Stable and incorporate pro forma credit metrics following the proposed issuance. Upward pressure on the ratings could occur if the University’s balance sheet materially strengthened as evidenced by a consistently higher level of expendable resources-to-debt and a sustained reduction in employee future benefit obligations or if Trent’s academic profile and reputation show significant continued improvement. The ratings could experience downward pressure if operating performance deteriorates significantly on a sustained basis through a loss of fiscal discipline or if there is a notable decline in FTE enrolment or negative changes to the higher education operating environment. A negative rating action could also occur if debt evolves significantly above current expectations or if outlays related to unfunded pension liabilities rise significantly, placing pressure on financial resources.

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.

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.

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