DBRS Morningstar Assigns Ratings of AA (low), Stable Trends, to Carleton University

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of AA (low) with a Stable trend to Carleton University (Carleton or the University). DBRS Morningstar also assigned a provisional rating of AA (low) with a Stable trend to the proposed Senior Unsecured Series A Debentures (Senior Unsecured Debentures) to be issued by the University in a principal amount up to $220 million. The ratings are supported by Carleton's position as a leading comprehensive university in Canada with an improving research profile, a track record of sound fiscal management, large expendable resources, and manageable debt burden. A constrained government funding and tuition fee framework along with intense competition for domestic students are factors limiting the ratings. The Stable trends reflect DBRS Morningstar's view that Carleton is well positioned to manage within a challenging operating environment while still maintaining strong financial risk metrics and incorporate the impact of the proposed issuance of up to $220 million of senior unsecured debentures.

Carleton has a well-recognized academic profile as a leading comprehensive university and is an integral component of the provincial and national postsecondary network. The University is well regarded for programmatic strengths in arts, social science, science, engineering, business, public administration, and journalism and ranks among the top-25 research universities in Canada. This has supported steady growth in full-time equivalent (FTE) students, averaging 1.9% annually over the past five years. Carleton also appears in international rankings, which has supported a growing share of international enrolment (~15% of total enrolment on a headcount basis in 2019–20). While the ongoing Coronavirus Disease (COVID-19) pandemic has led to increased competition for domestic students and an expectation that FTE enrolment will decline modestly over the medium term, DBRS Morningstar believes that this impact will be temporary and readily manageable given the strength of Carleton's academic profile.

Carleton has a track record of sound fiscal management and strong operating performance. Over the past five years, consolidated surpluses have averaged 12.7% of revenues—the best result of any DBRS Morningstar-rated university. In 2019–20, Carleton reported a surplus of $40.2 million, or 6.0% of revenues. This was down from a $102.7 million surplus a year earlier, largely a result of the decline in investment income and the negative impact on ancillary operations related to the coronavirus pandemic. The effect on capital markets, and on campus sales, later in the fiscal year was significant. In addition, the 10% decrease in tuition fees mandated by the government had a negative impact year over year.

For 2020–21, DBRS Morningstar anticipates a consolidated surplus in line with the previous year mainly due to strong investment returns. Over the medium term, operating results are likely to be pressured due to declining enrolment as lower first-year intakes in 2020–21, and possibly 2021–22, work their way through the system, but DBRS Morningstar still expects consolidated results to remain in a surplus position.

Carleton's total debt was estimated to be $59.3 million at April 30, 2021, or a very modest $1,994 per FTE. The University intends to issue senior unsecured debentures up to a maximum amount of $220 million in 2021–22, with proceeds being used to support the capital plan. Following the proposed issuance and amortization of existing debt, the resulting pro forma debt burden of $275.0 million translates to $9,508 per FTE student. Despite expectations that FTE enrolment will fall in each of the next three years, the amortization of existing debt should result in a declining debt per FTE ratio, approaching $9,200 by 2024–25. Absent any structural subordination to other University debt or liabilities, and terms and conditions consistent with market practice, the proposed Senior Unsecured Debentures would be rated in line with the Issuer Rating.

Carleton has considerable balance sheet flexibility, which has allowed the University to absorb the impact of the coronavirus pandemic with relative ease as well as make special contributions to the pension plan to mitigate future potential budgetary pressures. At April 30, 2021, expendable resources were estimated to be $404.8 million, or 683% of total debt. In 2020–21, expendable resources have been used to fund ongoing capital projects and also address shortfalls in ancillary operations resulting from the pandemic. Following the proposed debt issuance, and conservatively assuming further pandemic-related draws on expendable resources, DBRS Morningstar estimates the ratio will drop to approximately 129% of total debt.

RATING DRIVERS
A negative rating action could arise from a significant and sustained deterioration in operating results, materially higher-than-planned debt, or deterioration in the provincial rating. While unlikely, a positive rating action would be dependent on broad-based improvement in critical risk assessment factors, including Carleton's academic profile, and financial-risk metrics.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Public Universities (May 5, 2021; https://www.dbrsmorningstar.com/research/377955), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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

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