DBRS Morningstar Confirms University of Ontario Institute of Technology’s Ratings at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the University of Ontario Institute of Technology’s (the University or Ontario Tech) Issuer Rating and Series A Senior Unsecured Debentures rating at A (low). Both trends are Stable. The University’s credit profile has been steadily improving in recent years supported by a strengthening academic profile, ongoing student demand for its high-demand science, technology, engineering, and mathematics program offerings, positive operating results, and debt reduction. However, ratings are limited by Ontario Tech's limited financial flexibility as represented by DBRS Morningstar's calculation of expendable resources. In addition, the challenging operating environment and provincial policy uncertainty remain obstacles for all public universities in the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar).

After several years of positive operating results, the University reported a consolidated deficit of $2.6 million in 2019–20. The deficit primarily resulted from a decline in tuition revenues (-3.8%) and lower revenue from auxiliary services, such as parking operations (-12.6%), coupled with higher spending on salaries and benefits (+7.6%).

The University responded to the Coronavirus Disease (COVID-19) pandemic with campus closure and a transition to online learning, which resulted in adverse financial impacts on income and some additional expenses toward student assistance, technology investments, and sanitization and extensive cleaning. Subsequently, Ontario Tech revised its budget estimates downward in June 2020 to reflect additional operating pressures arising from the pandemic. However, the University's year-to-date performance is ahead of the June budget expectations, with Ontario Tech anticipating a nearly balanced result in 2020–21. The improved budget outlook stems from stronger-than-anticipated growth in international enrolment in fall 2020, supported by some savings on utilities, lower discretionary spending, and a favourable change in the compensation structure.

The medium-term outlook is less clear given ongoing travel restrictions and other pandemic-related health concerns. The University forecasts modest deficits over the next few years, though the actual performance will likely be slightly better than budget following a resumption of enrolment growth. Ontario Tech revised its enrolment projections downward but continues to budget enrolment growth of more than 5% over the next five years.

The University’s debt burden remains the highest among DBRS Morningstar-rated Ontario universities at $21,796 per full-time equivalent (FTE) student, although the circumstances surrounding Ontario Tech’s debt burden remain unique in the Ontario context. The Province supports a large share of the University’s annual debt-servicing costs through a restricted debt-servicing grant. While the legal obligations rest with the University, this arrangement effectively results in only one-third of its total debt being serviced through its general operations (e.g., unrestricted operating grants, tuition revenue). The University is contemplating approximately $25 million in new debt, resulting in debt per FTE above $22,000 over the next three years. Although the addition of a new bank loan will reduce borrowing flexibility within the current rating category, DBRS Morningstar anticipates Ontario Tech’s debt burden to decline gradually over the medium term as debt amortizes.

RATING DRIVERS
DBRS Morningstar does not expect the ratings to shift materially given a challenging outlook for the sector in general. However, a resumption of positive operating results and debt reduction, together with favourable resolution of operating and policy uncertainty, could lead DBRS Morningstar to consider changing the trend to Positive. Though unlikely, DBRS Morningstar could lower the rating if there is a sustained deterioration in operating outlook and a materially higher debt burden.

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 trends 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 the 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].

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