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

DBRS Limited (DBRS Morningstar) confirmed Simon Fraser University’s (SFU or the University) Issuer Rating and Senior Unsecured Debt rating at AA (low) with Stable trends. The ratings reflect SFU’s solid academic profile as a leading comprehensive university in Canada, its historically low debt burden, and its favourable location in the metropolitan Vancouver area. The ratings remain constrained by the current challenging operating environment with limited revenue flexibility, rising costs along with a somewhat uncertain outlook for enrolments, and as the University’s large, deferred maintenance needs.

For 2022–23, SFU recorded a consolidated surplus of $37.0 million compared with $104.0 million in the prior year. However, the DBRS Morningstar-adjusted operating surplus (before restricted contributions to endowments) was lower at $22.2 million, compared with $26.3 million in the prior year, as expenses continued to outpace revenue growth during the year.

The 2023–24 budgeted surplus of $29.9 million is slightly lower than the $37.6 million budgeted surplus in 2022–23. The University expects full-time equivalent (FTE) enrolment to increase by a modest 0.5%, reflecting growth in domestic enrolments. The University's management has indicated that fall term enrolments for domestic students are expected to be better than anticipated. While international enrolments still remain uncertain with some softness seen in the summer term confirmations, the University has made concerted efforts to convert student applications into confirmations and as a result fall term numbers are expected to be in line with, if not slightly better than, budgetary targets. Beyond 2023–24, the enrolment trajectory is expected to recover and the University projects an annual average increase of 2.0% through 2025–26. Although the projected enrolment increase is still somewhat uncertain with fresh concerns arising from the recent escalation of political tensions between India and Canada, DBRS Morningstar believes that the easing of visa processing-related issues along with SFU's academic strength and strong demand suggests that enrolment growth will likely remain in line with budget expectations.

Debt burden decreased by $5.0 million to $223 million, with debt-per-FTE at $8,300 compared with $8,375 in the previous year—in line with DBRS Morningstar's prior expectation. In the absence of additional borrowing, DBRS Morningstar expects SFU’s debt burden to gradually decline over the medium term, approaching $7,900 per FTE in 2025–26 (from $8,300 in F2023). The University is contemplating the use of the loan program for Phase 3 of its student housing project although there is currently no approval for this in place. Nevertheless, SFU has flexibility within the current ratings for additional borrowing.

RATING DRIVERS

The ratings are solidly placed in the current rating category and a positive rating action is unlikely in the near term, given the outlook for increasing debt and the challenging operating environment. A negative rating action could result from a significant and sustained rise in SFU’s debt burden beyond DBRS Morningstar’s current expectations.

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/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 not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this rating action.

DBRS Morningstar did not have 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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