Morningstar DBRS Downgrades the Credit Rating on Huron University College to BB (high) From BBB (low) With a Negative Trend

DBRS Limited (Morningstar DBRS) downgraded the Issuer Rating of Huron University College (Huron or the University) and the credit rating on the University's Senior Unsecured Debentures to BB (high) from BBB (low). The trends on both credit ratings are Negative.

KEY CREDIT RATING CONSIDERATIONS
The ratings are 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, Western University (not rated by Morningstar DBRS). However, its historically weak operating performance, lack of internal liquidity, and elevated debt levels constrain the rating.

The credit rating downgrades reflect Huron's failure to demonstrate an improvement in operating performance in line with previous expectations, increased debt, and near-term refinancing risk. Despite rising enrolment and strong demand from domestic students, along with the opening of a new student residence that is contributing positively to operations, the University's fiscal recovery has been further delayed. Declining international enrolment is contributing to lower-than-planned revenues and fundraising efforts have not materialized as quickly as anticipated, although recently announced donations should start to contribute positively to operations over the medium term. In addition, total debt has increased above Morningstar DBRS' previous expectations because of Huron's reliance on its bank credit facility to fund operating shortfalls and lack of internal liquidity.

CREDIT RATING DRIVERS
A negative rating action could be taken if the University faces reduced access to external liquidity, fails to demonstrate an improvement in financial risk metrics (particularly interest coverage and deficit reduction), or continues to increase its reliance on bank credit facilities to fund operating shortfalls. A positive rating action is highly unlikely in the near term, but Morningstar DBRS could change the trend to Stable from Negative if Huron achieves a sustained improvement in key financial risk assessment metrics and the successful rollover of maturing debt.

CREDIT RATING RATIONALE
The University budgeted for a deficit of $5.6 million in 2024-25. However, based on the third-quarter update, performance is again tracking notably behind plan with a deficit of $10.9 million now anticipated. While tuition revenues are running close to target, most other revenue categories are weaker than expected, leaving total revenues 9.6% behind plan. Donations and transfers from the endowment account for much of the shortfall being under budget by $5.1 million.

Huron's medium-term forecast points to a gradual improvement in operating results although a return to surplus has been delayed by two years to 2028-29. This remains dependent on a turnaround in international enrolment while keeping expenditure growth relatively contained. While Morningstar DBRS acknowledges the strong demand for Huron's programs among domestic students (see "Ontario Universities: Rising Domestic Applications Provide Little Relief to Universities Facing Financial Challenges," published January 29, 2025), domestic tuition fees are much lower than international tuition fees and, because Huron is well ahead of its funded corridor with the Province of Ontario (rated AA with a Stable trend), growth in domestic enrolment does not increase government operating grants.

Management is optimistic that fundraising efforts will lead to increased investment income and transfers from the endowment, and the University continues to evaluate other potential revenue enhancement opportunities. Nevertheless, the budgetary outlook remains strained and leaves little flexibility to weather any unforeseen shocks. Morningstar DBRS will closely monitor for signs that the University is able to maintain a path to financial sustainability.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

CRITICAL RATING FACTOR (CRF) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of CRFs
In the analysis of Huron, the CRFs 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 CRF and the FRA
In the analysis of Huron, the CRF and the FRA carry approximately equal weight.

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 (February 3, 2025; https://dbrs.morningstar.com/research/447186), 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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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