DBRS Confirms Queen’s University at AA, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Queen’s University (Queen’s or the University) at AA with Stable trends. The ratings are supported by the University’s superior academic profile, strong operating performance and high level of expendable resources and endowment assets. The ratings are constrained by a relatively high level of debt per full-time equivalent (FTE) student for the assigned ratings, a difficult operating environment characterized by constrained funding growth and pension-related liabilities. Despite a weak demographic outlook for university-age students, Queen’s strong applicant pool and superior academic profile should support plans for generally stable enrolment over the medium term.

In 2015–16, the University recorded a consolidated surplus of $39.5 million, down from the prior year’s surplus of $61.9 million, as revenue growth of 7.2% was outpaced by expenses rising by 10.6%. DBRS notes that the majority of the increased revenue and corresponding expense was related to large donations of artwork during the year ($58.6 million appraised value). In 2016–17, DBRS anticipates that another consolidated surplus will be achieved given the higher-than-budgeted year-over-year enrolment growth of 3.3%, including an increase in the proportion of international students. Debt rose in line with expectations, as the University drew down the final tranche of a bank loan facility for two new residences in 2015–16, bringing debt per FTE to $11,477, up from $10,242 in 2014–15. Debt per FTE is expected to decline moderately through 2016–17 and 2017–18 because of continued enrolment growth and debt amortization. DBRS does not expect debt to rise materially over the medium term following the completion of the new residences. Queen’s strong balance sheet, including $931 million in endowment assets, helps to mitigate a relatively high debt burden by providing meaningful support to operations and future capital development.

Pension sustainability challenges have been mitigated somewhat since the time of the last review, with the new round of provincial solvency relief (announced in October 2016) expected to notably reduce special payments to address the solvency deficit, as discussions continue around the establishment of a jointly sponsored pension plan with other universities in the Province of Ontario (rated AA (low) with a Stable trend by DBRS).

RATING DRIVERS
The credit profile may come under pressure if debt rises above current levels, if balance sheet flexibility (e.g., expendable resources) deteriorates notably or if operating performance weakens on a sustained basis as a result of negative developments in the operating environment. Upward pressure on Queen’s credit profile remains unlikely given the University’s current ratings, which are above that of the provincial funder, and its relatively high debt burden. The post-secondary operating environment in the province remains challenging and is entering a period of transition, although DBRS does not anticipate that upcoming changes to the university funding formula will be materially negative to Queen’s because of its leading academic profile and ability to attract students.

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.