DBRS Confirms Concordia University at “A,” Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Concordia University (Concordia or the University) at “A,” both with Stable trends. The ratings reflect Concordia’s position as a leading English-language university in the Province of Québec (Québec or the Province; rated A (high) by DBRS), a sound academic profile, the high level of financial support provided by the Province and management’s responsiveness to budget issues. Nevertheless, the credit profile is under increasing pressure as a result of steadily rising debt and a challenging operating environment characterized by relatively flat enrolment, shrinking provincial funding and weak operating results.

Results weakened significantly in 2014-15 with a consolidated deficit of $31.9 million, or 6.1% of total revenue. Revenue declined by 4.2% as reductions in provincial grants more than offset modest growth in tuition revenue while total expense rose by 4.2%, driven by higher compensation and facility costs. Adjusting for a non-recurring, one-time restructuring charge related to the Voluntary Departure Program (VDP), the deficit was $23.1 million.

F2015-16 is expected to have been similarly challenging as the University was subject to a subsequent $6.2 million provincial funding reduction, growth in tuition fees for domestic residents under the provincial framework was limited and enrolment declined marginally. On a non-GAAP Operating Fund basis, the University is expecting a deficit of between $7.0 million and $8.0 million. As in past years, operating expense growth has been driven by rising compensation and facility costs.

The outlook for the operating results remains challenging despite a number of measures undertaken to address the budget challenges that have emerged. The University conducted a VDP aimed at reducing the administrative ranks, imposed budget reductions on administrative and academic units and is now exploring other ways to improve the cash flow in light of the strained operating environment. Concordia is now in the process of developing its 2016-17 operating and capital budgets and, while a clear budget outlook is not available at this time, DBRS expects that operating results will remain weak over the medium term. While the University is making some adjustments to address cost pressures, DBRS believes that Concordia will be challenged to achieve balanced operating results on a sustainable basis without meaningful support from the Province or increased flexibility to raise tuition rates.

The weak operating environment and ongoing capital pressures have led to steady growth in debt. It is estimated that the debt burden has risen to $10,000 per full-time equivalent (FTE) for the year just ended, up from $8,001 per FTE four years earlier. Interest coverage was down to 2.7 times (x) in 2014-15 from 5.0x the prior year. Debt is expected to rise further in the coming years, with initial budget planning assumptions suggesting that the debt burden could reach $10,500 per FTE as soon as 2016-17.

DBRS could take a negative rating action at the time of the next rating review if the University fails to materially slow debt growth and implement a credible plan to restore balance on a sustainable basis.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Public Universities, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting 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.