Morningstar DBRS Confirms Credit Ratings on McMaster University at AA With Stable Trends

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

KEY CREDIT RATING CONSIDERATIONS
The 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 a potential slowdown in enrolment following federal restrictions on international study permits and prior increases in debt, leave limited capacity within the current ratings to withstand unforeseen shocks.

McMaster reported a consolidated surplus of $137.5 million in 2023-24, or 9.1% of revenues little changed from the prior year. The consolidated budget projects a surplus of $32.6 million in 2024-25, followed by surpluses of $45.8 million and $5.4 million in the following two years. Morningstar DBRS 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 2.0% annually from 2025-26 through 2026-27 given the ongoing restrictive environment for international enrolments. Morningstar DBRS believes that despite the operating headwinds, the University will meet or slightly exceed budget targets based on a history of outperformance.

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. However, when combined with lower enrolment, debt per FTE is forecast to rise to $12,035 per FTE in 2024-25, and approach $12,109 per FTE by 2026-27. Morningstar DBRS anticipates McMaster will meet or slightly 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. Although unlikely given the current operating challenges, a positive credit rating action would be dependent on broad-based improvement in critical risk assessment factors, and/or material reduction in debt.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

CRITICAL RATING FACTORS (CRFs) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of CRFs
In the analysis of McMaster, the CRFs are considered in the order of importance contemplated in the methodology.

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

(C) Weighting of the CRFs and the FRA
In the analysis of McMaster, the CRFs carry 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 (September 6, 2024)
https://dbrs.morningstar.com/research/439045

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

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/431153.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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