DBRS Morningstar Changes Trend on Brock University to Negative, Confirms Ratings at A (high)

DBRS Limited (DBRS Morningstar) changed the trends on Brock University's (Brock or the University) Issuer Rating and Senior Unsecured Debentures rating to Negative from Stable. DBRS Morningstar also confirmed both ratings at A (high).

The trend changes reflect DBRS Morningstar's understanding that Brock has been disproportionately affected by the Coronavirus Disease (COVID-19) pandemic as a result of increased competition for domestic students. This, in turn, has resulted in a weaker enrolment outlook and deterioration in operating performance and interest coverage relative to expectations in May 2020, when DBRS Morningstar assigned a rating of A (high) with a Stable trend to Brock's new Series B Senior Unsecured Debentures. Furthermore, while debt is not increasing from the spring 2020 issuance, lower enrolment translates to higher debt per full-time equivalent (FTE) over the near term.

Like all universities, the coronavirus pandemic that began in March 2020 required Brock to shift to remote learning, resulting in increased costs and foregone revenues. However, with just six weeks remaining in the fiscal year, the impact was very manageable for 2019–20; Brock reported a consolidated surplus of $11.9 million, or 3.3% of revenues. This was down from a $15.9 million surplus recorded a year earlier.

For 2020–21, Brock has experienced a much lower than planned first-year student intake, resulting in FTE enrolment contracting by 0.8%. Based on a second-trimester financial update, the University now anticipates a deficit of $2.8 million on a financial statement basis. Revenues have been severely affected by the ongoing pandemic as lower enrolment has weighed on student fees and the ongoing campus closure has reduced ancillary revenues. Management has taken significant steps to mitigate the impact through reductions in personnel costs, other operating costs, and the deferral of capital expenditures.

Over the medium term, management continues to target a balanced budget each year, as mandated by the board of trustees. Despite the pandemic, this target has not been altered. With stable operating grants and frozen tuition fees, annual revenue growth typically falls short of annual expense growth, necessitating mitigation targets each year. As a result of the challenging operating environment, interest coverage is expected to range between 2.0 times (x) and 2.5x in 2020–21 and 2021–22, compared with DBRS Morningstar's expectation in May 2020 that it would remain above 3.0x.

For 2020–21, total debt is estimated to be $265.3 million, up 86.5% from 2019–20 as a result of the $125 million in Series B Senior Unsecured Debentures issued in May 2020. At the time of the May 2020 issuance, DBRS Morningstar anticipated that debt per FTE would remain below $12,000; however, lower-than-planned enrolment is expected to push debt per FTE to approximately $12,400 in 2020–21. As existing debt matures, debt per FTE is expected to fall to approximately $11,300 in 2022–23.

RATING DRIVERS
Absent an improvement in Brock's enrolment outlook within the next 12 months, a one-notch downgrade of the ratings is possible given the anticipated deterioration in key financial risk assessment metrics such as interest coverage and debt per FTE. Should Brock demonstrate an improved operating outlook supported by further enrolment growth and/or resumption of on-campus activities, specifically ancillary operations, resulting in improved interest coverage and reduced debt per FTE, DBRS Morningstar could 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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