DBRS Morningstar Confirms Ratings on Carleton University at AA (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debenture rating of Carleton University (the University or Carleton) at AA (low). Both trends are Stable. The ratings are supported by Carleton's position as a leading comprehensive university in Canada with an improving research profile, a track record of sound fiscal management, large expendable resources, and a manageable debt burden. The ratings remain constrained by the current challenging operating environment, which allows limited revenue flexibility despite rising costs, as well as a somewhat uncertain outlook for enrolments. The Stable trends reflect DBRS Morningstar's view that the University continues to remain relatively well positioned to withstand any pressures from the challenging operating environment and that any softening in operating results will be temporary.

Following several years of reporting positive results, Carleton posted a deficit of $17.8 million for 2021–22. For 2022–23, the University’s operating budget expects a return to surplus of more than $12.0 million, supported by investment gains and cost containment efforts despite an anticipated decline in student fees as a result of declining enrolments. The University made a concerted effort to reduce discretionary expenses to help mitigate the anticipated decline in tuition revenues. However, on a consolidated basis, the university expects a deficit of $13.8 million resulting from a continued use of reserves for renovations and deferred maintenance.

For 2023–24, a balanced budget has been presented, supported by investment gains partly offset by the anticipated decline in enrolments. Carleton has revised its enrolment forecast to reflect the lingering multi-year impacts of the visa-processing backlogs experienced in the prior year on the enrolment trajectory and anticipates a decline in full-time equivalent (FTE) enrolment (-2.1%) for 2023–24. However, DBRS Morningstar believes that the easing of visa processing related issues suggests some upside for the University's near-term enrolment and operating outlook.

Following the issuance of $220 million during 2021–22, long-term debt totalled $270.4 million at April 30, 2022, or $9,463 per FTE student. Given the University's revised enrolment forecast now anticipates a further softening outlook for enrolments compared to the prior year, the decline in debt per FTE is anticipated to materialize at a slower pace, approaching $9,000 by 2026–27 compared with DBRS Morningstar's prior expectations.

RATING DRIVERS
The University has limited flexibility in the current rating category. A negative rating action could arise from a failure to reverse the declining trend in operating results and enrolments on a sustained basis and materially higher-than-planned debt. A positive rating action is not contemplated, and would be dependent on broad-based improvement in critical risk assessment factors, including Carleton's academic profile, and financial-risk metrics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology:
-- Rating Public Universities (May 17, 2023; https://www.dbrsmorningstar.com/research/414148)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577