DBRS Morningstar Confirms the University of Toronto at AA with a Stable Trend

DBRS Limited (DBRS Morningstar) 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 challenging operating environment and some uncertainty about the direction of provincial policy remain a challenge for all Province of Ontario (Ontario; rated AA (low) with a Stable trend by DBRS Morningstar) universities.

The University reported a surplus of $441 million for the year ended April 30, 2020, or 12.2% of revenue. The result was mainly driven by enrolment growth, international tuition fee increases, and additions to reserves and infrastructure. Toward the end of the fiscal year, additional operating pressures arose from the novel Coronavirus Disease (COVID-19) pandemic, which led to a loss of some ancillary revenues (such as residence refunds to students, declines in parking and hospitality revenues, etc.) and added expenses toward pandemic-related research and emergency financial support to students. At the same time, the sharp decline in equity markets weighed on the University's endowment and pension funds.

The outlook for 2020 is subject to increased uncertainty. While many students opted for additional courses over the summer, the outlook for the fall term is less certain given ongoing travel restrictions and other pandemic-related health measures. Based on initial application data and the gradual reopening of University campuses, DBRS Morningstar remains cautiously optimistic about fall 2020 enrolment.

While the pandemic has resulted in near-term uncertainty, the medium-term outlook is somewhat clouded by provincial policy uncertainty. Taken together, the University may face some operating pressures. Nevertheless, DBRS Morningstar notes that U of T is one of the strongest universities in Ontario from a financial management perspective. The University has significant balance sheet flexibility, a strong management team, and a responsive budget model, and it continues to identify opportunities to increase revenue and control/defer costs.

The University has planned several maintenance, renovation, and expansion projects over the medium term. However, the strength of U of T’s balance sheet and its effective approach to capital budgeting likely preclude the need for material new borrowings in the near term. As such, DBRS Morningstar projects the University’s debt burden to fall below $8,200 per full-time equivalent student by 2024–25 from $8,614 in 2019–20.

RATING DRIVERS
DBRS Morningstar does not expect the ratings to shift materially given the University’s exceptionally strong financial ratios and prudent fiscal management. Though unlikely, a negative rating action could result from a significant and sustained deterioration in operating results leading to a substantially weakened balance sheet.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Public Universities (May 15, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional 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.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577