DBRS Morningstar Confirms McMaster University at AA with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed McMaster University’s (McMaster or the University) Issuer Rating and Senior Unsecured Debt rating at AA. All trends remain Stable. The ratings are supported by McMaster’s strong academic profile, steady enrolment growth, track record of strong financial management, and considerable financial flexibility, though the current provincial policy environment adds an element of uncertainty to the medium-term operating outlook.

The University reported a consolidated surplus of $157.0 million, or 13.2% of revenues for the year ended April 30, 2019. This was an improvement over the prior-year surplus of $105.7 million, and one of the strongest results among DBRS Morningstar-rated universities. The strong performance was largely driven by a combination of higher tuition revenue, increased research-oriented funds, and stronger investment performance.

McMaster is projecting consolidated budget surpluses for the next three years, supported by ongoing demand from international students. Following the provincially mandated domestic tuition-fee reduction and tuition freeze in the subsequent year, DBRS Morningstar expects growth in domestic funding and tuition to remain constrained. As a result, the University plans to change the student mix as a greater number of programs (including health, business and science) seek higher and more diversified international enrolment. This is expected to drive modest growth in enrolment over the medium-term outlook, with McMaster pursuing faster growth in international enrolment and fees than previously envisioned. Some cost pressures may arise as the University adds additional faculty to keep pace with rising enrolment.

The University’s debt totalled $254.7 million as at April 30, 2019. In its 2019 Debt Strategy, McMaster indicated that it may issue additional debt within the next 12 months. Incorporated within the existing ratings is DBRS Morningstar’s assumption that debt per full-time equivalent (FTE) remains below $12,000.

On December 12, 2019, McMaster named Dr. David Farrar as the University’s new President. Dr. Farrar currently serves as McMaster’s acting President, having joined the University in 2017 as Provost and Vice-President, Academic. DBRS Morningstar expects continuity and stability in the University’s strategic direction following this appointment.

RATING DRIVERS
Over the medium term, an increase in debt-per-FTE ratio to over $12,000 could result in downward pressure on the rating. A negative rating action could also arise from a sustained deterioration in operating performance. A positive rating action, though unlikely, could result from an upgrade of the provincial funder rating and an improvement in the government funding and tuition frameworks.

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

The principal methodology is Rating Public Universities, which can be found on dbrs.com under Methodologies & Criteria.

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.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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