DBRS Morningstar Confirms Ratings on Wilfrid Laurier University at “A,” Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Wilfrid Laurier University (Laurier or the University) at "A" with Stable trends. Laurier’s ratings are supported by its academic profile, location near Toronto, steady enrolment growth in recent years, and stable revenue base. 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. Additionally, Laurier has limited operating flexibility as it seeks to eliminate operating budget deficits, which further constrains its ratings.

For 2022–23, management has indicated that modest declines in overall enrolments and lower-than-anticipated international enrolments have resulted in a deficit on an operating-budget basis. Nevertheless, a one-time sale of one of the University’s upper-year residence assets is likely to result in a consolidated surplus position, temporarily offsetting pressures from anticipated revenue shortfalls.

The 2023–24 budget anticipates a deficit of $1.9 million (on an operating-budget basis). Additionally, based on a more recent forecast by the University, a net additional revenue shortfall of $3.0 million is anticipated driven by lower-than-projected enrolments. The University is implementing a series of financial control measures to offset the shortfall targeted toward achieving a deficit of no greater than the approved budget deficit and will also likely use its prior year surplus to bridge any lingering shortfalls. Full-time equivalent (FTE) enrolment growth is expected to remain modest for 2023–24 and recover over the medium term with an average growth of 2.8% to 21,778 FTEs by 2025–26.

DBRS Morningstar notes that the University has implemented budgetary policies over the last few years to gradually replenish its reserves over the long term, exercised spending control to offset budgetary pressures as well as scaled back on capital plans with the deferral of the Milton, Ontario, campus development, demonstrating prudent budgetary practices. However, the budgetary outlook remains strained. Absent an increase in international enrolments in line with the University's expectations, along with the ability to increase tuition fees for domestic students, or an increased operating grant funding, the University would likely risk the continuation of deficits, reversing the modestly improving trend of available, expendable resources over the medium term. DBRS Morningstar will look to the subsequent multiyear operating budget and ongoing enrolment outlook for signs that the financial pressures are abating. Additionally, given ongoing inflationary pressures and substantively improved finances at the provincial level, the Province of Ontario may be compelled over the medium term to provide some more flexibility for domestic tuition fees, or targeted increases in grant funding, to support the sector's overall financial health.

In light of the construction deferral for the Milton campus, the University has indicated no debt issuance needs until 2027. Some debt may be needed for the leasehold improvements to the leased space under consideration for the fall 2024 programming to be offered at Milton. However, the University will use debt capacity, which will be generated from the sale of the upper-year residence assets and consequent reduction of related debt. Based on Laurier's latest enrolment forecast and debt amortization, and assuming no debt issuance, DBRS Morningstar projects that debt per FTE will decline to less than $9,500 by F2025 from $10,046 at YE2023, slightly slower compared with prior expectations.

RATING DRIVERS
DBRS Morningstar does not expect the ratings to shift materially given Laurier's current financial risk metrics and the challenging operating environment. A negative rating action could arise from a combination of factors, including failure to reverse the declining trend in operating results and stabilize enrolments in line with targets on a sustained basis, a sharp increase in debt levels, or materially adverse changes in government funding policies. A positive rating action is not contemplated; however, a reduction in the overlay factor for operating flexibility could occur if the University is able to demonstrate a surplus position on a sustained basis and continues to replenish reserves along with the absence of material new debt for the Milton campus.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/416784 (July 4, 2023).

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit 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 credit 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].

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