Morningstar DBRS Confirms Ratings on McMaster University at AA with Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of McMaster University (McMaster or the University) at AA with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings are supported by McMaster’s strong academic profile, track record of strong financial management, and considerable financial flexibility as evidenced by a large pool of expendable resources. However, a constrained funding and tuition environment, combined with expectations for modestly lower enrolment and prior increases in debt, leave limited capacity within the current ratings to withstand unforeseen shocks.

McMaster reported a consolidated surplus of $149.6 million, or 10.6% of revenues in 2022–23, driven by strong investment returns of 7.1%. The consolidated budget projects a surplus of $74.2 million in 2023–24, followed by surpluses of $66.0 million in each of the following two years. DBRS Morningstar notes McMaster has a practice of using conservative budget assumptions and seeks to meet or exceed targets. McMaster has conservatively planned for a reduction in full-time equivalent (FTE) enrolment, averaging 1.6% annually from 2023–24 through 2025–26. This reflects the University's objective to reduce domestic undergraduate enrolment to be in line with its funded corridor as well as a modest forecast for international enrolments due to a large graduating cohort in 2023–24 and impacts of past visa backlog issues.

With no new debt anticipated in the near term, McMaster's debt is expected to decline gradually as a small piece of bank debt continues to amortize. For 2023–24, total debt is expected to be $417.3 million. However, when combined with lower enrolment, debt per FTE is forecast to rise to $12,051 per FTE in 2023–24, and approaching $12,300 per FTE by 2025–26. DBRS Morningstar anticipates McMaster will outperform its enrolment targets, leading to more favourable debt-per-FTE metrics.

CREDIT RATING DRIVERS
Should debt-per-FTE continue rising on a sustained basis, this could result in downward pressure on the ratings. A negative rating action could also arise from a sustained deterioration in operating performance. A positive rating action, though unlikely, could result from a combination of an upgrade of the provincial funder rating, an improvement in the government funding and tuition frameworks, and material reduction in debt.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, and Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023) https://dbrs.morningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of McMaster University, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of McMaster University, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of McMaster University, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Rating Public Universities (17 May 2023)
https://dbrs.morningstar.com/research/414148/rating-public-universities.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.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 credit rating action.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

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

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