DBRS Morningstar Confirms Ratings on University of Ottawa at AA (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of the University of Ottawa (uOttawa or the University) at AA (low). Both trends are Stable. The University’s credit profile is supported by its strong reputation as a leading research-intensive university, breadth of program offerings, and status as Canada’s largest bilingual university. The University also benefits from its location in Canada’s capital, positive operating results, and relatively strong balance sheet. The challenging operating environment and some uncertainty about the direction of provincial policy remain obstacles for all public universities in the Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar).

Following the onset of the Coronavirus Disease (COVID-19) pandemic, uOttawa shifted its operations to online platforms. In 2019–20, operating results deteriorated somewhat as the pandemic resulted in an adverse financial impact of $9.1 million during the final months of F2020 because of increased spending on student financial assistance, IT investments, and extensive cleaning and sanitization as well as refunds and loss of revenue from ancillary operations (such as student rent, parking, retail activities, etc.). Nevertheless, the University reported a surplus of $35.7 million for the year ended April 30, 2020 (or 3.1% of revenue). This was lower than the surplus of $91.8 million in the prior year.

In 2020–21, the University budgeted for a consolidated deficit of $26.5 million that includes an anticipated adverse financial impact of $65.8 million in lost revenues and increased expenses because of the pandemic. However, the University's year-to-date performance is better than anticipated, supported by ongoing student demand, steady investment returns, and some cost savings on utilities, travel, maintenance, repairs, etc. As such, DBRS Morningstar believes that 2020–21 operating results will come out ahead of initial budget estimates.

The medium-term outlook is less clear given ongoing travel restrictions and other pandemic-related health concerns affecting on-premise activities. As of this report, the University had not provided medium-term projections and will present a three-year budget to its board of governors in early 2021. DBRS Morningstar expects uOttawa's actual performance to recover gradually following a resumption of enrolment growth.

In February 2020, the University issued $300 million of unsecured debentures (maturing in 2060). As such, the debt-per-full-time equivalent (FTE) ratio increased to $13,513 in 2019–20 (from $7,625 in the prior year). The increase in debt reduced borrowing flexibility within the current rating category. However, DBRS Morningstar anticipates the ratio will decline gradually in the absence of any new debt and as debt amortizes. Over the medium term, DBRS Morningstar projects that the debt-to-FTE ratio will decrease to about $12,500 per FTE.

RATING DRIVERS
A positive rating action is unlikely in the near to medium term given recent increases in debt and a challenging operating environment. DBRS Morningstar could downgrade the rating if there is a sustained and significant 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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