DBRS Morningstar Upgrades University of Ontario Institute of Technology to “A” from A (low), Changes Trends to Stable

DBRS Limited (DBRS Morningstar) upgraded the University of Ontario Institute of Technology’s (the University or Ontario Tech) Issuer Rating and Series A Senior Unsecured Debentures credit rating to “A” from A (low). Concurrently, DBRS Morningstar changed the trends to Stable.

The University was placed on a positive trend on June 16, 2023, following the Province of Ontario’s (Ontario or the Province; rated AA (low) with a Positive trend by DBRS Morningstar) trend change, and DBRS Morningstar’s expectation of continued enrolment growth and declining debt for Ontario Tech. At that time, DBRS Morningstar indicated that Ontario’s trend change was modestly credit positive for universities; however, any credit rating actions are likely to be linked to changes in multiple critical credit rating and financial risk assessment factors rather than just the funding government’s credit rating alone. The upgrade reflects improvements in the University’s financial risk assessment stemming from positive operating results and an improved debt and enrolment outlook.

The credit ratings are also supported by a gradually improving academic profile; ongoing student demand for its science, technology, engineering, and mathematics program offerings. DBRS Morningstar notes that the current operating environment, given constrained funding and tuition frameworks, remains a challenge for all public universities in Ontario.

Ontario Tech reported a surplus of $2.6 million in 2022–23 (compared with a surplus of $12.4 million in 2021–22) as revenue benefitted from enrolment growth, higher on-campus activity, and a high interest rate environment, which supported investment income. Total expenses increased 8.7% from the previous year and include a noncash loss on the termination of a capital lease.

The University is forecasting a surplus in 2023–24 versus the original balanced budget. Total enrolment is favourable against target, with strong domestic enrolment that was higher than budgeted. International student demand remains strong; although, visa issues prevented many international students from arriving in Canada, resulting in negative variance from budget (six months ended September 30, 2023). The ongoing freeze on domestic tuition fee increases and intense competition for domestic students could pressure the outlook for domestic enrolment in the coming years.

DBRS Morningstar's debt forecast has improved since the time of the previous review, with the debt-per-full-time-equivalent (FTE) ratio expected to fall to less than $19,000 per FTE following an improved enrolment outlook. DBRS Morningstar estimates debt will remain elevated through the near to medium term, before gradually declining thereafter as existing debt amortizes. Although DBRS Morningstar views Ontario Tech’s debt burden as elevated among Ontario universities, it acknowledges the unique circumstances surrounding the debt, reflecting a policy decision made by the Province at the time of establishing the University. While the legal obligation rests with the University and provincial grants flow through Ontario Tech, only about one-fifth of the debenture debt is serviced through general operations of the University.

CREDIT RATING DRIVERS
DBRS Morningstar could lower the credit ratings if there is a significant and sustained deterioration in operating outlook and, thereby, the University's financial risk assessment.

Following the latest credit ratings upgrade, a subsequent positive credit rating action is unlikely in the near term, especially given the challenging outlook for the sector. However, a positive credit rating action could result from sustained improvement in financial risk assessment metrics and an improvement in DBRS Morningstar's assessment of one or more critical credit rating factors.

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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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/rating-public-universities

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 ratings were initiated at the request of the rated entity.

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

These are solicited credit ratings.

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 credit ratings are under regular surveillance.

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

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