DBRS Confirms the University of Toronto at AA with a 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 reflect the University’s exceptional academic profile, strong student demand and effective management practices, which have translated into positive operating results and a strong balance sheet. Large pension and post-retirement benefit liabilities do represent credit challenges but have improved in recent years.

The University reported an exceptional operating result for the 2017–18 fiscal year, with a $465 million surplus and a $486 million increase in net assets. The strong results reflect relatively strong investment earnings, the accumulation of operating and capital reserves and the impact of making significant capital investments funded, in part, by government capital grants.

The University’s strategic direction remains unchanged from past years, though the outlook for enrolment has weakened because of the new Strategic Mandate Agreement (SMA). Ontario universities concluded their second SMA with the Province of Ontario in late 2017 and early 2018. These agreements set out academic priorities, enrolment targets and funding expectations. Under U of T’s agreement, enrolment and operating grant funding are now expected to remain relatively stable during the 2017–20 period.

While the SMAs were intended to provide a degree of policy and funding certainty to the university sector, the recent change in government does create uncertainty. The Progressive Conservative Party of Ontario’s election platform was largely silent on post-secondary education policy but did commit to a broader effort to reduce the size of the public sector to balance the provincial budget and to fund tax reductions.

Nevertheless, U of T remains among the strongest universities from a financial management perspective. The University continues to budget for balanced budgets and maintains significant budget and balance sheet flexibility. In addition, the University has a strong management team and a responsive budget model.

The University continues to make significant investments in capital renewal and expansion; however, the strength of U of T’s balance sheet and its effective approach to capital budgeting preclude the need for material new borrowings. DBRS projects the University’s debt burden will fall below $8,900 per full-time equivalent in 2018–19 and track modestly lower over the medium term.

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. 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 principal methodology is Rating Public Universities, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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