DBRS Morningstar Changes Trend on University of Guelph to Positive, Confirms Ratings at A (high)

DBRS Limited (DBRS Morningstar) changed the trend on the University of Guelph’s (Guelph or the University) Issuer Rating and Senior Unsecured Debt rating to Positive from Stable and confirmed both ratings at A (high). The trend change reflects (1) Guelph’s steadily declining debt burden and anticipation it will improve further over the next three years, (2) DBRS Morningstar’s confidence that the University will be able to weather a challenging operating environment and that any softening in operating results will be temporary, and (3) the University’s continued progress toward the implementation of a multi-employer University Pension Plan (UPP), which will provide relief to the operating budget.

Despite a challenging operating environment, the University has a track record of strong operating performance. For 2018–19, Guelph posted a consolidated surplus of $46.7 million (excluding the unrealized loss on interest rate swaps), which has declined slightly year over year as expenses outpaced strong revenue growth.

DBRS Morningstar anticipates Guelph will likely endure small operating deficits over the next few years but that these will be manageable and temporary. The University intends to address the recent policy changes with initiatives to grow revenues (i.e., international enrolment) and expand unregulated program offerings, in addition to identifying opportunities for increased efficiencies.

Guelph continues to work with the University of Toronto and Queen’s University to develop a multi-employer UPP, which is expected to come into effect on July 1, 2021. Upon implementation, the three universities will no longer be required to make special solvency payments or make contributions to the Pension Benefit Guaranty Fund, which will significantly reduce future contribution requirements. Further, the calculation of going-concern liability under the UPP will eliminate the requirement to include provision for adverse deviation when calculating the going-concern liability and will allow any outstanding going-concern liability to be amortized over 15 years.

Guelph’s debt continues to gradually decline as existing debt amortizes and no new borrowing needs arise. As at April 30, 2019, total debt was $217.4 million, or $9,540 per full-time equivalent (FTE). DBRS Morningstar expects debt per FTE to decline to about $7,500 by 2021–22. The University’s robust balance sheet and expendable resources (roughly 200% as a proportion of debt) are some of the strongest among rated peers.

RATING DRIVERS
A positive rating action is likely within the next 12 months if (1) debt per FTE continues to decline (expected to fall below $8,000 over the medium term); (2) progress toward the establishment of the UPP continues, which DBRS Morningstar expects will provide relief to the operating budget; and (3) projected operating deficits remain temporary and manageable, supported by considerable balance sheet flexibility. A deterioration in the operating or debt outlooks from current expectations could cause DBRS Morningstar to change the trend back to Stable.

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 additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada