DBRS Limited (DBRS Morningstar) changed the trends on Brock University's (Brock or the University) Issuer Rating and Senior Unsecured Debentures rating to Stable from Negative. DBRS Morningstar also confirmed both ratings at A (high).
The trend changes reflect DBRS Morningstar's view that Brock's enrolment forecast has modestly improved and, combined with responsive management, will lead to an improvement in financial risk metrics relative to previous expectations. DBRS Morningstar continues to expect the University to post balanced operating results, or better, on a consolidated basis. Interest coverage should remain close to 3.0 times (x), and debt per full-time equivalent (FTE) will decline below $12,000 by 2022–23.
In 2020–21, Brock reported a consolidated surplus of $7.0 million, including a one-time gain related to the sale of the Hamilton Campus. Excluding the gain on sale of assets, this equates to a surplus of $5.2 million, or 1.5% of revenues. Although down from the prior-year surplus of $11.9 million, this was better than expected at the time of DBRS Morningstar's last review, largely on account of one-time provincial Coronavirus Disease (COVID-19) support funding (see the DBRS Morningstar commentary “Ontario Provides Relief Funding for Severely Affected Universities,” March 22, 2021). Despite enrolment weakness, Brock continues to demonstrate strong and responsive management of University finances.
For 2021–22, Brock’s second-trimester financial update points to a surplus of $3.0 million on a consolidated financial statement basis. Revenues continue to be affected by the pandemic, with student fees estimated to be down $8.1 million, or 4.1%, relative to budget driven by declines in international students, although the resumption of on-campus learning in fall 2021 is supporting a material recovery in ancillary revenues. Brock realized savings on personnel costs through ongoing cost-mitigation strategies, and a mitigation target of $2.1 million remains for 2021–22.
Over the medium term, DBRS Morningstar expects management to continue targeting a balanced budget each year, as mandated by the board of trustees. Despite the pandemic, this target has not been altered. With stable operating grants and frozen tuition fees, annual revenue growth typically falls short of annual expense growth, necessitating mitigation targets each year.
University debt totalled $265.3 million at April 30, 2021, up by 86.5% year over year following the issuance of $125.0 million in senior unsecured debentures in May 2020. Weaker operating results, combined with higher interest costs, reduced interest coverage to 3.0x from 4.7x in 2019–20. For 2021–22, DBRS Morningstar expected debt per FTE of $12,136, somewhat better than anticipated relative to DBRS Morningstar's last review. Going forward, DBRS Morningstar expects debt per FTE to fall below $12,000 in 2022–23 and continue falling to approximately $10,200 by 2024–25.
Should Brock experience a setback in its enrolment outlook or further material disruptions to on-campus activity, resulting in a deterioration in its key financial risk metrics relative to current expectations, this may lead to a negative rating action. A positive rating action is unlikely in the near term given limited flexibility in the current rating category.
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.
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).
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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.
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