DBRS Morningstar Confirms University of Toronto at AA with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of the University of Toronto (U of T or the University) at AA with Stable trends. The ratings reflect the University’s exceptional academic profile, strong student demand, and effective financial management practices, which have translated into positive operating results and a strong balance sheet despite the ongoing Coronavirus Disease (COVID-19) pandemic. The challenging operating environment—including the constrained provincial funding and ongoing tuition freeze for domestic students—remains a challenge for all Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar) universities.

Similar to other universities, the coronavirus pandemic affected the University's operations and prompted it to exercise cost-control measures to offset revenue pressures. Operating pressures arising from the pandemic led to a loss of some ancillary revenues (such as residence fees, parking, and hospitality revenues, etc.) and added expenses toward pandemic-related research and emergency financial support to students. Despite the pressures, the University reported a surplus of $726 million or 18.2% of revenues for the year ended April 30, 2021, compared with a surplus of $441 million or 12.2% of revenues in the previous year.

The University continues to present a balanced operating budget in 2021–22 with the deficit from ancillary activities to be bridged using prior-year surpluses. The University expects to resume partial on-campus learning by September 2021, assuming travel restrictions are eased with the ongoing coronavirus vaccine roll out, and it expects to meet its enrollment targets. The University's COVID-19 Readiness Plan, aimed at providing students with support and accommodation during any required quarantine period, was approved by the federal government in October 2020, allowing international students to enter the country. However, DBRS Morningstar recognizes that considerable uncertainty still lingers around student mobility, led by the transmission of new coronavirus variants, complicated travel and visa rules, and the implementation of coronavirus vaccination plans. Nevertheless, DBRS Morningstar notes that U of T has significant balance sheet flexibility, a strong management team, and a responsive budget model, and it continues to identify opportunities to increase revenue and to control or defer costs.

The strength of U of T’s balance sheet and its effective approach to capital budgeting likely preclude the need for material new borrowings in the near term. As such, DBRS Morningstar projects the University’s debt burden to fall below $7,800 per full-time equivalent student by 2025–26 from $8,337 in 2020–21.

RATING DRIVERS
DBRS Morningstar does not expect the ratings to shift materially given the University’s exceptionally strong financial ratios and prudent fiscal management. Though unlikely, a negative rating action could result from a significant and sustained deterioration in operating results, leading to a substantially weakened balance sheet.

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.

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@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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