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, robust enrolment growth, track record of strong financial management, and considerable financial flexibility. Collectively, this has allowed the University to navigate through the Coronavirus Disease (COVID-19) pandemic with limited effect on its credit profile, despite taking on additional debt for capital renewal and expansion. However, the operating environment is likely to remain challenging, given a constrained funding and tuition environment, the emergence of new coronavirus variants, and reintroduction of public health measures.

McMaster reported a consolidated surplus of $232.0 million, or 17.8% of revenues. This was a notable increase from $92.1 million the previous year and brings the five-year average surplus to 11.8% of total revenues. The improvement was largely driven by strong investment returns, while strong enrolment growth also provided support.

Despite the ongoing pandemic, DBRS Morningstar expects McMaster's operating performance to remain sound. The consolidated budget projects a surplus of $78.8 million in 2021–22, followed by surpluses of $100.7 million and $99.8 million in the subsequent two years. DBRS Morningstar notes that McMaster has a practice of using conservative budget assumptions and has taken a similarly conservative approach regarding its assumptions around campus reopening and related financial impacts. While the emergence of the omicron variant raises some concerns, DBRS Morningstar believes McMaster has the flexibility to withstand modest deterioration in operating performance.

Following the issuance of two new debentures in June 2021 for $150 million, and incorporating strong enrolment growth and amortization of existing debt, debt per full-time equivalent (FTE) is expected to be approximately $11,900 at April 30, 2022. By 2023–24, debt per FTE is expected to gradually decline toward $11,400 assuming average annual FTE growth of 2.0% over the next three years with no further debt issuance anticipated.

RATING DRIVERS
A material increase in the debt-per-FTE ratio to over $12,000 on a sustained basis 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 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 5, 2021; https://www.dbrsmorningstar.com/research/377955), 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).

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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