DBRS Morningstar Changes Trend on Concordia University to Stable, 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 Stable from Positive and confirmed both ratings at “A”. The trend change reflects DBRS Morningstar's assessment that the Coronavirus Disease (COVID-19) pandemic has resulted in broad-based deterioration of Concordia's financial risk profile, driven by an increasingly challenging operating environment, deteriorating medium-term operating outlook, and increasing debt. As a result, improvement in the University's credit profile as originally anticipated (see press release dated November 13, 2019) is no longer expected.

At the time of the last review, DBRS Morningstar indicated that it would likely upgrade Concordia if the outlook for the funding environment and operating results remain favourable. The onset of the pandemic prompted the University to shift to remote learning, negatively affected first-year intake, reduced ancillary revenues, led to increased operating costs, and has had a material negative impact on the medium-term operating results and debt outlook for the University.

In 2019–20, Concordia reported a consolidated deficit of $31.3 million, more than the $19.8 million loss in the prior year. Growth from tuition revenue and government grants was partly offset by loss of revenue from ancillary services, rental properties, student services, and lower donations and investment income. Although Concordia demonstrated spending prudence, expense growth continued to outpace revenues.

In June 2020, Concordia implemented a revised budget model that integrates operating, capital, and cash budgets, and introduced centralized frameworks for a funding program and a financing plan. The 2020–21 budget forecasts an operating budget deficit of $37.8 million, which includes a net adverse financial impact of $20.7 million related to the pandemic.

Operating budget deficits will likely linger over the medium term. In the absence of material new provincial funding, Concordia plans to address any deficits through a combination of cost savings, reserve drawdowns, and external debt. Concordia's 2021–22 budget will attempt to address some of the post-pandemic structural challenges over a three-year horizon and will be presented to the Board of Governors in May 2021.

The University's debt burden is set to increase meaningfully in the coming years, with University-supported debt likely to rise by an average of 40% over the next three years. Concordia has indicated that it will access debt for both strategic investments and to fund a portion of projected operating deficits over the medium term. This differs from the practice at most other DBRS Morningstar-rated universities where debt financing is only used for capital purposes. DBRS Morningstar estimates University-supported debt-to-full-time equivalent will increase to approximately $21,000 by F2023. DBRS Morningstar notes that the increase in debt will considerably reduce borrowing flexibility and limit ratings improvement over the medium term.

RATING DRIVERS
The combination of a weakened outlook for funding and tuition frameworks, sustained deterioration in operating results, and increased levels of debt materially beyond current expectation may prompt a negative rating action. A positive rating action is highly unlikely, given the challenging operating outlook for the sector in general. However, DBRS Morningstar could consider changing the trend to Positive if the University is able to demonstrate effective deficit-reduction strategies, to rebuild expendable resources as calculated by DBRS Morningstar, and if the growth in debt materializes at a meaningfully slower pace than expected.

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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