DBRS Confirms Ratings on Brock University at A (high), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Brock University (Brock or the University) at A (high) with Stable trends. The ratings are underpinned by the University’s position as a mid-sized comprehensive university in the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS) and supportive financial risk assessment (FRA) metrics. Provincial policy changes introduce an element of uncertainty going forward as the recently announced tuition cut will restrain revenue growth and uncertainty around provincial grant funding could present additional challenges. The Stable trend is supported by Brock’s new strategic plan and favourable enrolment outlook and expectations for sustained fiscal discipline. As a result, DBRS believes the University has capacity to absorb increased debt to fund ancillary operations without eroding the current credit profile.

For the year ended April 30, 2018, Brock recorded a surplus of $12.0 million, up from $8.8 million the previous year. This equates to 3.6% of total revenues, or 2.8% of total revenues on a rolling five-year basis, and the fifth consecutive surplus. For 2018-19, Brock presented a balanced budget (funding basis), although structural challenges remain as expenditure growth continues to outpace revenue growth, necessitating careful in-year management to adhere to budget targets. This represents the second balanced budget without the need for specific mitigation targets. Total revenues are forecast to rise by 3.0%, driven by a combination of higher tuition rates and enrolment growth. Total expenditures are budgeted to grow by 5.2% in 2018-19, driven primarily by rising salary and benefit costs. Brock’s second-trimester update will be presented in March 2019 and DBRS expects that the balanced budget target is likely to be met or exceeded.

At April 30, 2018, total debt was $146.7 million, down by 1.6% year over year. Another year of modest enrolment growth reduced debt per full-time equivalent (FTE) to $7,225 from $7,420 in 2016-17. Brock’s medium-term plan now envisions new borrowing to fund the renewal and expansion of ancillary facilities. By 2021-22, debt is expected to reach approximately $204.0 million, representing an increase of roughly $58.0 million from 2017-18. Assuming average annual enrolment growth of 3.1% over the next four years, debt per FTE is expected to rise to approximately $8,900. This marks a material shift in the outlook from the time of DBRS’s last review, but is considered manageable within the existing rating category, provided that fiscal discipline remains intact and enrolment targets are met.

RATING DRIVERS
Ratings improvement is not expected over the medium term, given the rising debt burden and a more constrained operating environment for universities. Downward ratings pressure could arise from a combination of further deterioration in the funding and tuition framework caused by additional government policy changes and a resulting deterioration in FRA metrics beyond that already contemplated by the planned increases in debt.

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 & Criteria.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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