DBRS Morningstar Changes Trend on Concordia University to Positive, Confirms Ratings at “A”

DBRS Limited (DBRS Morningstar) changed the trend on Concordia University’s (Concordia or the University) Issuer Rating and Senior Unsecured Debt rating to Positive from Stable and confirmed both ratings at “A.”

The trend change reflects a combination of the (1) improving provincial operating grant funding combined with the rating upgrade on the Province of Québec (the Province; rated AA (low) with a Stable trend by DBRS Morningstar); (2) stronger growth in domestic tuition fees and deregulation of international tuition fees; and (3) improving operating results, which reflect the improving funding environment and the deficit-reduction measures adopted by the University in recent years. DBRS Morningstar will likely upgrade Concordia’s Issuer Rating and Senior Unsecured Debt rating within the next 12 months if the outlook for the funding environment and operating results continues to improve.

Concordia’s finances continue to progress through a period of adjustment. Between 2010–11 and 2015–16, the Province reduced funding to the university sector as part of its broader deficit-reduction efforts, prompting a significant deterioration in the University’s finances and requiring significant budgetary constraint and reforms. The Province began restoring lost funding in 2017–18 and has announced favourable changes to the tuition fee framework. As a result of the expense-management initiatives and an improved revenue outlook, operating losses have gradually declined and the outlook is increasingly positive.

Concordia posted an adjusted deficit of $10.7 million in 2018–19, modestly better than the $11.0 million loss in the prior year. Higher revenue from solid growth in tuition fee revenue, higher government grants and stronger donations and investment income were offset by broad-based growth in expenses as the University continued to invest in growth initiatives. The outlook for 2019–20 has improved and Concordia projects a return to a modest surplus of $1.2 million on a narrower operating budget basis, suggesting that the adjusted consolidated result is likely to improve further.

DBRS Morningstar expects the University’s finances to show steady, albeit modest, improvement over the medium term. Revenue growth is likely to strengthen with growth in provincial grants and deregulation of most international student fees, but will be partially offset by rising salary and wage costs resulting from the recent renewal of the faculty collective agreement, which provided more significant compensation increases in consideration of past salary constraint and pension reform.

Concordia’s debt burden increased in recent years because of operating losses and ongoing capital expansion. The University’s debt-to-full time equivalent rose to $13,062 in 2018–19 and is projected to range between $13,000 and $13,500 over the next three years. Concordia indicated that it may issue new market debt in the coming years as it seeks to rebalance its debt profile, but is unlikely to meaningfully increase its overall level of University-supported debt beyond current levels.

RATING DRIVERS
DBRS Morningstar will likely upgrade the University’s Issuer Rating and Senior Unsecured Debt rating within the next 12 months if the outlook for the funding environment and operating results remains favourable. The combination of a weakened funding outlook and tuition frameworks, deteriorating operating results and increased debt levels beyond current expectation may lead DBRS Morningstar to change the trend back to Stable.

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 [email protected].

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

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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