DBRS Morningstar Confirms Ratings on University of Guelph at A (high), Positive Trends

DBRS Limited (DBRS Morningstar) confirmed the University of Guelph’s (Guelph or the University) Issuer Rating and Senior Unsecured Debt rating at A (high). The trends on both ratings remain Positive.

On March 3, 2020, DBRS Morningstar changed the trends on both ratings to Positive from Stable and indicated that a ratings upgrade would be possible if (1) debt per full-time equivalent (FTE) continued to fall (below $8,000 over the medium term); (2) the transition toward a multiemployer University Pension Plan (UPP) continues, which will provide relief to the operating budget; and (3) DBRS Morningstar remains confident that the University will be able to weather a challenging operating environment and that any softening in operating results will be temporary. DBRS Morningstar acknowledges that the first two conditions have been satisfied; however, the onset of the Coronavirus Disease (COVID-19) pandemic has led to a more challenging operating environment than was anticipated at the time of last year's rating action and uncertainty continues regarding the outlook for enrolment, a return to on-campus activities, and stabilization of operating results.

Following several years of strong operating results, Guelph reported a deficit of $7.9 million (including $1.3 million unrealized loss on interest rate swaps) in 2019–20. The deficit was largely driven by investment losses prompted by volatile markets in March and April 2020 and lower tuition and student fees due to a provincially mandated domestic tuition fee cut of 10% for 2019–20.

For 2020–21, the University projected an operating deficit of $29.6 million, which includes an estimated net adverse financial impact of about $19.0 million from pandemic-led challenges. While the University has not provided a recent budget projection for 2020–21, DBRS Morningstar understands that Guelph will likely endure an operating deficit this year and over the medium term. Nevertheless, management has indicated that deficits will be modest and temporary as Guelph attempts to offset potential ancillary fee pressures and any financial market volatility through modest enrolment growth, controlled expenses and internal reserves, if necessary. The University continues to explore initiatives to grow revenues (including international enrolment) and expand unregulated program offerings.

Participation in the multiemployer UPP (with the University of Toronto and Queen's University) will likely be materially positive for Guelph’s operating outlook once fully implemented. The plan will come into effect on July 1, 2021, and eliminate the need to make special solvency payments or make contributions to the Pension Benefit Guaranty Fund, which will significantly reduce Guelph's future contribution requirements. Further, the calculation of going-concern liability under the UPP will eliminate the requirement to include provision for adverse deviation when calculating the going-concern liability and will allow any outstanding going-concern liability to be amortized over 15 years.

Guelph’s debt continues to gradually decline as existing debt amortizes and no new borrowing needs arise. As at April 30, 2020, total debt was $205.3 million, or $8,822 per FTE. DBRS Morningstar forecasts the University’s debt per FTE to decline to approximately $7,000 by 2022–23. The University's robust balance sheet and expendable resources (roughly 200% as a proportion of debt) are some of the strongest among rated peers.

RATING DRIVERS
An upgrade is likely within the next 12 months if DBRS Morningstar has increased confidence that projected operating deficits will remain modest and temporary. To resolve this trend, DBRS Morningstar will look to the forthcoming multiyear operating budget, early indications of fall 2021 enrolment, and any potential return to on-campus activities that would support an improvement in ancillary operations as signs that the operating outlook has stabilized. A material deterioration in the operating or debt outlooks from current expectations could cause DBRS Morningstar to change the trends to Stable.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Public Universities (May 15, 2020; https://www.dbrsmorningstar.com/research/361071), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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