DBRS Confirms the University of Toronto at AA, Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of the University of Toronto (the University or U of T) at AA. Both trends are Stable. The ratings continue to reflect the University’s exceptional academic profile, strong enrolment outlook and effective financial management practices, which have translated into positive operating results and a strong balance sheet. The University’s credit profile continues to experience some weakness in the form of large pension and post-retirement benefit liabilities and a constrained revenue model that is the result of provincial policy decisions pertaining to operating grants and tuition fees.

The University reported exceptional operating results for the 2016–17 fiscal year, with a $417 million surplus and a $1.1 billion increase in net assets. The strong result significantly outpaced the University’s mid-year projection, which largely reflects the strong market returns on the University’s investment portfolios that occurred in the second half of the fiscal year and efforts made by faculties and divisions to set aside operating contingency reserves and capital reserves.

The University has tabled a balanced budget for the 2017–18 fiscal year and a balanced long-term budget outlook. While Ontario’s university sector is facing enrolment and funding-related challenges, U of T remains one of Canada’s leading universities and has not been meaningfully challenged in achieving its enrolment and financial objectives. The University continues to see strong student demand and to attract considerable research funding and donations/contributions. The outlook for the University remains strong, and U of T has ample budget and balance sheet flexibility to meet unforeseen or adverse changes in the operating environment.

The University continues to make significant investments in capital renewal and expansion across its three campuses; however, the strength of U of T’s balance sheet and its effective approach to capital budgeting are expected to limit the need for new borrowings. The University does not plan to issue any material external debt over the next three years. As such, DBRS projects the University’s debt burden to fall below $8,900 per full time equivalent (FTE) by 2019–20 from its current level of $9,145 per FTE.

RATING DRIVERS
DBRS expects the ratings to remain stable over the medium term given the University’s exceptionally strong financial ratios and stable academic profile. A positive rating action would require an improvement in the funding environment or an upgrade of the Province of Ontario, though DBRS notes the methodology does not limit the number of notches a university rating may exceed that of its government funder. A negative rating action could result from a significant and sustained deterioration in operating results leading to a significant weakening of the balance sheet.

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.