Morningstar DBRS Confirms Huron University College at BBB (low) with a Negative Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Huron University College (Huron or the University) at BBB (low) and maintained the Negative trend.

KEY CREDIT RATING CONSIDERATIONS
The rating is supported by Huron's position as an elite, primarily undergraduate, liberal arts institution with strong demand for its niche programs and the profile and operational benefits of its affiliation with a larger, well-recognized university—the University of Western Ontario (UWO; not rated by Morningstar DBRS)— benefit the ratings. However, its historically weak operating performance, lack of internal liquidity (partially mitigated by a debt service reserve), and elevated debt levels constrain the rating.

At the time of the last review, Morningstar DBRS changed the trend on the ratings to Negative from Stable to reflect the delay in the University’s efforts to return to a sustainable fiscal position. Huron’s fiscal recovery has been impeded by international enrolment challenges that have led to a much slower pace of enrolment growth than the University initially anticipated. The University has made concerted efforts to improve its operating results through cost savings and revenue enhancement strategies with visible modest improvements in the debt per full-time equivalent student (FTE) metric. While these efforts are viewed positively, the budgetary outlook remains strained and, absent a stabilization of the international enrolment outlook, the University would likely risk the continuation of deficits beyond 2026–27. Further, Morningstar DBRS will closely monitor the impact of the student visa cap on Huron’s enrolment outlook and operating budget for signs that the University is able, at the least, to maintain a path to financial sustainability in line with current projections.

On a consolidated basis, the University budgeted for a deficit of $7.7 million in 2023–24, in line with prior year estimates. Based on the third-quarter update, performance is tracking modestly better than plan, with a forecast revenue growth of +3.3% compared with the budget. Overall enrolments are expected to increase by 7.2% year over year, driven by strong domestic demand. However, international student numbers are projected to decline by 8.2% in 2023–24 and to continue to be affected by visa processing delays, which have only been partly mitigated by stronger domestic enrolment.

Over the medium term, Huron forecasts a gradual improvement in operating results, eventually reaching a surplus position by 2026–27. This assumes average annual enrolment growth of 9.3% (primarily domestic) between 2023–24 and 2027–28, completion of the new residence by fall 2024, stable government grants, and modest expenditure growth. To an extent, the pivot toward enrolling substantially higher numbers of domestic students to offset the subdued international enrolment forecast should support the University's debt reduction goals. Subject to Huron achieving these targets, Morningstar DBRS expects debt to trend downward, approaching $34,600 per FTE by 2027–28 compared with $43,600 per FTE previously anticipated.

CREDIT RATING DRIVERS
A negative rating action could arise if the University fails to demonstrate an improvement in financial risk metrics (particularly interest coverage and deficit reduction) in line with current projections. A positive rating action is highly unlikely in the medium term, but the Negative trend could be changed to Stable if Huron achieves a sustained improvement in key financial risk assessment metrics, including declining operating deficits, interest coverage, and maintenance of the projected pace and magnitude of debt reduction.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Huron, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Huron, 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 Huron, 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 (May 17, 2023), https://dbrs.morningstar.com/research/414148

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 info-DBRS@morningstar.com.

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 info-DBRS@morningstar.com.

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