DBRS Upgrades McMaster University to AA, Trends Stable

DBRS Limited (DBRS) upgraded McMaster University’s (McMaster or the University) Issuer Rating and Senior Unsecured Debt rating to AA from AA (low). The trends on both ratings are Stable. While DBRS’s usual practice is to have a positive trend prior to an upgrade for a university, DBRS believes that McMaster’s credit risk profile is now consistent with the AA rating. Since the time of the downgrade in 2010, the University’s financial risk metrics have improved significantly, while the University’s academic profile has modestly improved.

The University delivered an exceptionally strong operating result in 2016–17, reporting a surplus of $129.2 million (11.8% of revenue), which was largely the result of unusually strong investment earnings — a common trend in the sector in 2016–17. The University’s core operating budget is structurally balanced, supported by strong student demand, the capacity to increase both domestic and international enrolment, a robust research profile and effective management practices. The University has consistently reported strong operating results over the last five years, which has contributed to robust growth in net assets. Net assets have risen by 65% over the last four years and reached $1.1 billion in 2016–17.

The operating outlook remains favourable. The University’s 2017–18 budget projected a consolidated surplus of $57.4 million for the current year and similarly large surpluses in subsequent years. The University has yet to provide a mid-year financial update, but initial indications suggest that results are likely tracking to plan. Over the medium term, the University’s strategic plan emphasizes modest ongoing enrolment growth and further research intensification, already among the strongest in the country. While some moderation in financial results may be expected, the outlook remains broadly positive and supportive of the higher rating.

The University’s financial profile has improved in recent years and is expected to remain relatively stable over the medium term. The University’s balance sheet is among the strongest of DBRS-rated universities, exhibiting a relatively low level of debt, ample expendable resources and a large endowment. DBRS expects debt to remain relatively stable, notwithstanding a modest increase in 2017–18, resulting from the introduction of a new provincial climate change-related program that will provide interest-free loans to Ontario universities. DBRS projects that McMaster’s debt-per-full-time equivalent (FTE) ratio will rise to $9,100 in 2017–18 and then decline gradually over the medium term to about $8,700 per FTE in 2019–20. Interest coverage (currently 12.5 times) and expendable resources-to-debt (currently 212%) are expected to remain elevated over the medium term.

DBRS expects the ratings to remain stable. A positive rating action could result from an upgrade of the provincial funder rating and an improvement in the government funding and tuition frameworks. A negative rating action could result from a deterioration in operating results and balance sheet flexibility.

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.