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 (U of T or the University) at AA with Stable trends. The ratings reflect the University’s exceptional academic profile, resilient operating performance and robust balance sheet. The constraining policy environment remains a challenge for all Province of Ontario (the Province; rated AA (low) with a Stable trend by DBRS) universities.

The University reported a surplus of $505 million for the year ended April 30, 2019, or 14.1% of revenue. The strong result primarily reflects student fee increases, enrolment growth, the accumulation of operating and capital reserves and capital investments.

U of T’s strategic direction remains largely unchanged from past years, with a focus on diversifying international enrolment, improving the student experience and developing alternate revenue sources by leveraging the University’s large real estate assets. The revenue outlook, however, has weakened due to recent changes in the provincial tuition fee and funding frameworks. The provincial government announced a 10% reduction in domestic tuition fees in 2019–20, which is to be followed by a tuition freeze in the subsequent academic year. U of T estimates the new tuition fee framework will reduce tuition revenue by $88 million in 2019–20.

The medium-term outlook appears challenging because of ongoing provincial expenditure restraint and uncertainty for the next round of Strategic Mandate Agreements. Nevertheless, U of T is one of the strongest universities from a financial management perspective. The University forecasts balanced budgets over the next five years, maintains significant balance sheet flexibility and continues to make progress on pension reform. In addition, the University has a strong management team and a responsive budget model and continues to identify opportunities to increase revenue and streamline services.

The University continues to make investments toward maintenance, renovation and expansion projects. However, the strength of U of T’s balance sheet and its effective approach to capital budgeting preclude the need for material new borrowings in the near term. As such, DBRS projects the University’s debt burden to fall below $8,600 per full-time equivalent by 2023–24 from $8,816 in 2018–19.

RATING DRIVERS
DBRS expects the ratings to remain stable over the medium term given the University’s exceptionally strong financial ratios and robust student demand. A positive rating action is dependent on a material improvement in the policy environment and a rating upgrade of the Province. Though unlikely, a negative rating action could result from a significant and sustained deterioration in operating results leading to a substantially weakened 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 & 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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