DBRS Upgrades Brock University to A (high)

DBRS Limited (DBRS) has today upgraded Brock University’s (Brock or the University) Issuer Rating and Senior Unsecured Debentures rating to A (high) from “A” and has revised the trends to Stable from Positive. At the time of its last review, DBRS indicated that, if operating performance remained sound in an environment of declining enrolment and constrained provincial funding and that new debt needs did not arise, the ratings could be upgraded by one notch. Despite leadership changes and an ongoing presidential search, the upgrade reflects a sustained improvement in fiscal discipline, most recently demonstrated by the adoption of a new Fiscal Framework, while business risk factors remain largely unchanged. This has resulted in a continuation of sound operating performance amid a soft enrolment outlook and an understanding that capital needs can be met without additional debt.

In 2015-2016, Brock reported an operating surplus of $6.4 million or 2.0% of total revenues, marking the University’s third consecutive surplus, though down from the prior year. For 2016-2017, the budget once again targets a balanced position which DBRS believes to be readily achievable. Total revenues are budgeted to grow by 1.5% year over year, driven by higher tuition rates and a modest enrolment increase. Meanwhile, total expenses are budgeted to rise by 4.3% in 2016-2017 before incorporating $3.9 million in planned mitigation measures. Based on management’s indications, enrolment has been stronger than anticipated and cost-containment efforts continue, which points to the likelihood of another modest surplus by year end. As mandated by the Board, and as identified in the Fiscal Framework, Brock continues to target balanced results through 2019-2020 with deficits only permitted when mitigation targets have been clearly identified. Nevertheless, DBRS notes that the operating environment remains challenging as growth in provincial funding and permitted tuition-fee increases continue to be outpaced by inflationary cost pressures.

At April 30, 2016, debt totalled $151.3 million, down by 1.4% compared with the previous year. As the enrolment decline was less than anticipated, debt per full-time equivalent (FTE) declined to $7,609 from $7,652 in 2014-2015. Brock’s Fiscal Framework adopted a debt-reduction strategy aimed at repaying existing debts as they come due with no new debt anticipated for capital needs. As a result, the University’s debt burden is expected to gradually decline over the medium term. Based on Brock’s current enrolment forecast, which anticipates modest growth of 3.7% between 2015-2016 and 2021-2022, debt per FTE is expected to improve further to $7,430 in 2016-2017 and continue declining to $6,001 by 2021-2022. This marks a modest improvement from expectations at the time of DBRS’s last review, on account of an improved enrolment forecast. Furthermore, post-employment benefit obligations remain very manageable.

RATING DRIVERS:
Following the upgrade, further rating improvement is unlikely over the medium term. DBRS expects that business risk factors are unlikely to change materially; therefore, any rating movement is likely to be the result of changes in the financial risk assessment. While not anticipated, downward rating pressure could arise from a relaxation in fiscal discipline that leads to a sustained deterioration in operating performance and increased debt tolerance.

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.