DBRS Confirms University of Guelph at A (high), Stable Trends

DBRS Limited (DBRS) confirmed the University of Guelph’s (Guelph or the University) Issuer Rating and Senior Unsecured Debt ratings at A (high). Both trends are Stable. The ratings are supported by the University’s well-established academic profile, robust student demand and strong financial risk assessment metrics. The future direction of provincial post-secondary policy adds an element of uncertainty to the medium-term outlook while ongoing pension reform provides promise for the University, once achieved.

The University continues to post strong operating results, reporting a surplus of $62.0 million in 2017–18. This equates to a recurring operating surplus of $55.5 million, or 6.7% of total revenues, excluding the unrealized gain on interest rate swaps. This marked a decline from very strong 2016–17 results on account of reduced investment income.

The medium-term outlook remains clouded by provincial policy uncertainty and planned pension reforms. DBRS anticipates that the budgetary outlook has weakened, and Guelph is likely to endure small operating deficits in the short term. The University is evaluating potential mitigation strategies to address the recent tuition cut, which could entail targeting further operational efficiencies and other initiatives to grow revenues, such as increased graduate and international enrolment. Nevertheless, Guelph benefits from a relatively strong balance sheet, which provides flexibility to endure a difficult operating environment without the need to make drastic cuts that could impact the core academic mission.

Guelph continues to work with two other universities to develop a multi-employer jointly sponsored pension plan. DBRS understands that considerable progress has been made and that the Province of Ontario (rated AA (low) with a Stable trend by DBRS) remains supportive of the initiative. The universities are currently targeting an implementation date of July 1, 2021. If successful, the universities will be responsible for their existing going concern deficits but will no longer be required to make special solvency payments, which would significantly reduce future contribution requirements for Guelph.

Guelph’s debt burden is on a gradual downward trend falling to $229.7 million in 2017–18, or $10,165 per full-time equivalent (FTE). The University has ample balance sheet flexibility to fund capital needs internally and existing debt will continue to amortize. As a result, DBRS expects debt per FTE to approach roughly $8,500 by 2020–21.

RATING DRIVERS
A negative rating action is unlikely, given the University’s stable academic profile and strong financial risk assessment metrics. A resolution of the University’s pension challenges, reduced uncertainty regarding the provincial university operating environment and continuation of strong financial risk metrics could give rise to a positive rating action.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Public Universities (May 2018), 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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