DBRS Morningstar Confirms Université du Québec à Montréal at "A" with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of the Université du Québec à Montréal (UQAM or the University) at "A" with Stable trends. The ratings reflect UQAM's importance to the Université du Québec network and the Province of Québec (rated AA (low) with a Stable trend by DBRS Morningstar), the high level of provincial support for the University, and a relatively low debt burden. However, the ratings are constrained by a weak enrolment outlook that continues to weigh on operating performance and by the absence of expendable resources, as measured by DBRS Morningstar.

Like all universities, UQAM's operations have been significantly affected by the Coronavirus Disease (COVID-19) pandemic. The University has mostly closed its campuses and is delivering its teaching activities remotely. For 2020–21, the University estimated that the coronavirus pandemic would result in $9.6 million in lost revenues and increased expenses.

In spring 2020, the coronavirus pandemic was unfolding as UQAM was preparing its 2020–21 budget. As a result of heightened uncertainty, as permitted by the Ministère de l’Éducation et de l'Enseignement supérieur (the Ministry), the University’s board approved spending authority consistent with 2019–20 spending including amounts for indexation. Based on initial estimates, an operating fund deficit of $13.3 million was anticipated. A formal 2020–21 budget was subsequently presented in November 2020, which forecast a deficit of $8.0 million. The improved outlook has been supported by stable grant funding, along with temporary special operating grants, and a turnaround in enrolment. The number of full-time equivalent students (FTEs) is estimated to grow by 2.3%—the first increase in six years—partly driven by students taking increased course loads.

The University is in the process of developing its 2021–22 budget, and given the ongoing pandemic, another deficit is anticipated. As a result of ongoing deficits in the operating fund, the University will be required to establish a multiyear recovery plan in agreement with the Ministry. While past changes to provincial policy and reinvestments have been positive for UQAM and have helped to address underlying cost pressures, the main headwind facing the University continues to be weak enrolment, driven in part by soft demographic trends for the university-age population within UQAM’s primary catchment area in Québec.

The University’s debt burden is considered low for the ratings at $5,006 per FTE in 2019–20, down modestly from the prior year as existing debt continues to amortize. DBRS Morningstar estimates debt-per-FTE to fall to $4,800 in 2020–21 and, provided enrolment stabilizes, to approximately $4,700 in 2021–22. The University has no expendable resources as measured by DBRS Morningstar, but the University has access to lines of credit for short-term financing needs.

RATING DRIVERS
The ratings could experience downward pressure if the University undertook significant borrowing and if operating performance weakened notably on a sustained basis, such that debt-per-FTE exceeds $12,000 and the consolidated operating deficit exceeds 3.0% of revenues (five-year rolling average). A positive rating action is considered unlikely in the current environment.

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.

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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