DBRS Confirms University of Toronto at AA

DBRS has today confirmed the rating of the University of Toronto’s (the University or UofT) Senior Unsecured Debentures at AA. The trend remains Stable. Despite the continuation of challenging operating conditions, sustained expenditure control, healthy enrolment growth and a marked rebound in investment returns have led to a sharp rebound in consolidated results. However, upcoming borrowing and steadily rising employee benefit expenses are expected to significantly reduce the room to maneuver within the current rating.

After a difficult fiscal year, consolidated results rebounded strongly to a sound surplus position in 2009-10, primarily driven by a sharp reversal in investment income. A 3.9% increase in full-time equivalent enrolment (FTE), higher tuition fees and full government funding for new students also contributed meaningfully to the sound performance and helped offset continued pressure from salary adjustments and employee benefit costs. Endowment assets also strongly benefited from the rebound of financial markets, rising nearly 12% year-over-year to $1.4 billion, the highest level in the sector. The budget remains balanced this year and the medium-term outlook points to balanced results going forward. However, reliance on cost containment initiatives will continue, as rapidly rising pension expenses owing to the University’s large unfunded liabilities and the likely continuation of slow provincial funding growth will put increasing pressure on results.

Debt maintained its slowly downward trend in 2009-10 as a result of maturing bank loans and ended the fiscal year at a moderately low level of $8,076 per FTE. However, plans to borrow up to $200 million over the near future will push debt back up to more than $700 million or approximately $11,000 per FTE. While such a debt burden has been factored into the credit profile for some time and is normally manageable for a university with the academic profile and financial resources of UofT, the University must also deal with large unfunded pension and post-employment benefit liabilities estimated at $1.27 billion and $400 million at April 30, 2010, respectively. These are expected to put increasing pressure on the budget and notably reduce UofT’s financial flexibility over the years to come. As a result, the new debt is expected by DBRS to use up most of the flexibility left in the current rating, but is unlikely to put undue pressure on the credit profile if budget discipline is maintained.

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

The applicable methodology is Rating Canadian Public-Private partnerships, which can be found on our website under Methodologies.