DBRS Morningstar Confirms McMaster University at AA with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed McMaster University’s (McMaster or the University) Issuer Rating and Senior Unsecured Debt rating at AA. All trends remain Stable. The ratings are supported by McMaster’s strong academic profile, steady enrolment growth, track record of strong financial management, and considerable financial flexibility, which have allowed the University to navigate through the Coronavirus Disease (COVID-19) pandemic with limited impact on its credit profile. However, the operating environment is likely to remain challenging, as provincial policy uncertainty and ongoing capital investment could pressure financial risk metrics over the medium term.

In 2019–20, the University reported a consolidated surplus of $92.1 million, or 7.9% of revenues. This marked a decline from $157.0 million, or 13.2% of revenues the prior year, reflecting weaker investment returns, ongoing cost pressures, and pandemic impacts.

The 2020–21 budget was prepared in spring 2020 amidst considerable uncertainty regarding the coronavirus pandemic and the impact it would have on university enrolment, ancillary operations, and unforeseen costs. As a result, the consolidated budget projected a deficit of $13.0 million in 2020–21, followed by surpluses of $49.9 million and $51.6 million in the following two years.

Based on McMaster's November 2020 interim financial update, a consolidated surplus of $7.2 million is now anticipated in 2020–21. This updated projection reflects a $57.3 improvement in tuition revenues due to higher-than-planned enrolment (both domestic and international), offset by lower ancillary and other revenues due to the ongoing campus closure. Additionally, expenses are projected to be materially lower than budget as a result of lower pandemic-related costs and deferred capital projects. Over the medium term, surpluses of $74.0 million to $98.5 million are anticipated between 2021–22 and 2023–24.

The University’s debt totalled $254.0 million as at April 30, 2020. In the absence of any new debt issuance, DBRS Morningstar expects a decline in the debt-per-full-time equivalent (FTE) ratio to $7,477 in 2020–21, and gradually falling toward $7,000 by 2022–23. The University indicated in its 2020 Debt Strategy that additional debt could be required to fund potential capital initiatives within the next 12 months. Incorporated within the existing ratings is DBRS Morningstar’s assumption that debt-per-FTE remains below $12,000.

RATING DRIVERS
An increase in the debt-per-FTE ratio to over $12,000 would result in downward pressure on the rating. A negative rating action could also arise from a sustained deterioration in operating performance. A positive rating action, though unlikely, could result from an upgrade of the provincial funder rating and an improvement in the government funding and tuition frameworks.

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 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].

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