DBRS Morningstar Assigns Ratings of BBB (low), Stable Trends, to Huron University College

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB (low) with a Stable trend to Huron University College (Huron or the University). DBRS Morningstar also assigned a rating of BBB (low) with a Stable trend to the $85 million Senior Unsecured Series A Debentures issued by the University. The rating is supported by Huron's position as an elite, primarily undergraduate liberal arts institution with strong demand for its niche programs and the profile and operational benefits of its affiliation with a larger, well-recognized university—the University of Western Ontario (UWO). However, historical weak operating performance, lack of internal liquidity (partially mitigated by a debt service reserve), and elevated debt levels (following the bond issuance) constrain the rating. The Stable trend reflects DBRS Morningstar's view that Huron will continue to execute on a credible plan to return the University to a sustainable fiscal path, grow enrolment, and gradually reduce debt.

Founded in 1863, Huron began as a theological college and is the founding college of UWO. Having gradually expanded its offerings, it is now recognized as an elite, primarily undergraduate liberal arts institution, although its profile is often overshadowed by its affiliation with neighbouring UWO. The University has undergone a transformation over the past few years, managing to improve its academic profile after the significant challenges it faced prior to 2016, including declining enrolments, aging infrastructure, and relatively low international enrolments. In 2017, the University implemented a revitalized strategy, which involved initiatives to renew its campus, make changes to its governance, and develop a new recruitment plan, which resulted in substantial growth in revenues as a result of more than doubling its head count. Despite its small size, the University benefits from some of its strategic partnerships in place with other institutions, which adds reputational value and supports the student experience at Huron. The affiliation agreement in place with UWO is the most prominent among these partnerships, which provides a competitive edge to Huron in terms of attracting students and provides Huron’s students with access to the larger UWO campus amenities and academic courses (Huron students can take up to 40% of their courses at UWO) in exchange for an affiliation fee as a percentage of tuition revenues.

The University’s efforts since 2017 have helped boost student demand and improve its market position; however, operating performance continues to remain relatively weak as it is pressured by a persistently high cost base. In recent years, Huron has exhausted cash balances and relied on credit facilities to cover operating shortfalls. In 2020–21, Huron reported a consolidated deficit of $3.1 million. On a DBRS Morningstar-adjusted basis, which excludes a $1.1 million noncash unrealized gain on interest rate swaps, this resulted in an adjusted deficit of $4.2 million, or -14.1% of revenues, a modest improvement from the $4.9 million (-17.0%) adjusted deficit a year earlier.

On a consolidated basis, the University projects a deficit of $3.6 million (excluding amortization) in 2021–22, and a multiyear return to positive operating results is expected by 2023–24. The recovery plan is based on continued enrolment increases, expansion of ancillary services (a new residence), and disciplined expenditure management.

As a result of weak operating results and recent capital projects, Huron has increased its reliance on debt in recent years. At April 30, 2021, Huron's total debt was $21.3 million, or $14,687 per full-time equivalent (FTE), up from $6.2 million, or $4,915 per FTE, the previous year.

In 2021–22, the University is issuing $85 million of senior unsecured debentures due April 30, 2042, with proceeds being used to partially reduce the outstanding balance on the term loan facility, build a new residence to increase enrolment capacity, renovate certain facilities, and strengthen Huron's liquidity position. Following the issuance and partial repayment of existing debt, the resulting pro forma debt burden of $98.2 million translates to $62,191 per FTE student. DBRS Morningstar expects debt to trend steadily downward approaching $41,000 per FTE by 2027–28 based on anticipated enrolment growth and a steady improvement in operating results to support debt repayment. This outlook is highly dependent on continued enrolment growth, although DBRS Morningstar notes that annual FTE growth has averaged almost 14.0% in the four years through 2021–22, which will carry forward into future years as students transition into upper years.

DBRS Morningstar understands that existing security granted under the term loan and credit facility has been removed, thereby ensuring that the new senior unsecured debentures rank equally with all other debt obligations. As such, the senior unsecured debentures rating is in line with the Issuer Rating.

RATING DRIVERS
A negative rating action could arise from a failure to demonstrate meaningful improvement in financial risk metrics in line with expectations, namely improved operating performance and interest coverage. Although not anticipated in the near term, a positive rating action would be dependent on a material and sustained improvement in key financial risk assessment metrics that leads to an improvement in internal liquidity and balance sheet flexibility.

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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