DBRS Morningstar Changes Trend to Stable, Confirms Ratings on University of Guelph at A (high)

DBRS Limited (DBRS Morningstar) changed the trend on the University of Guelph's (Guelph or the University) Issuer Rating and Senior Unsecured Debt rating to Stable from Positive and confirmed both ratings at A (high). The trend change reflects DBRS Morningstar's assessment that the Coronavirus Disease (COVID-19) pandemic has adversely affected Guelph's operating performance with the University now anticipating a balanced budget over the next few years. DBRS Morningstar acknowledges that University has been able to weather the challenging operating environment supported by a sound balance sheet flexibility. However, the earlier expectation that the softening in operating results would be temporary is no longer the case as the University seeks to eliminate structural operating budget deficits through a multiyear budget balancing approach.

Following several years of reporting strong operating results, Guelph posted a deficit for the second consecutive year, amounting to $15.9 million in 2020-21 compared with a deficit of $7.9 million in the prior year. The deficit was largely driven by the full-year impact of the pandemic-driven campus closure and the resultant effects on ancillary and other revenues.

Starting with the 2021–22 budget, University implemented multi-year year forecasting with a two-year planning horizon. On an operating budget basis, the 2021–22 budget projects a deficit of $25.4 million to be largely offset using prior-year reserves as well as divisional surpluses. The budget anticipates a lower adverse financial impact of about $3.7 million from pandemic-led challenges and includes provisions for planned one-time investments, such as IT infrastructure upgrades, scholarships, and support for summer teaching programs. The University is projecting a decline in enrollment of 3.6% in 2021–22, largely because of de-registrations and deferrals, compared with the growth in enrolment in the previous five years.

Based on the multiyear forecast and indications provided by management, Guelph is anticipating operating budget deficits over the next few years and expects a balanced budget only by F2025. With the return to campus and increased campus activity, the University expects to balance its ancillary operations budget during F2022, which provides some upside to the operating outlook. Guelph has indicated that, while year-to-date operating performance remains slightly better than budgeted because of increased on-campus activity as well as cost-containment efforts, it still anticipates an operating budget deficit.

Guelph’s debt burden is on a gradual declining trend as existing debt continues to amortize. As at April 30, 2021, total debt declined to $192.9 million or $8,225 per full-time equivalent student (FTE), down from $205.3 million or $8,822 per FTE at YE2020. Assuming no debt issuance over the next few years, DBRS Morningstar forecasts the debt per FTE to decline to below $7,000 by F2024. The University has ample balance sheet flexibility and its expendable resources (roughly 200% as a proportion of debt) are some of the strongest among its DBRS Morningstar-rated peers.

DBRS Morningstar could consider a positive rating action if the University is able to demonstrate effective deficit-reduction strategies and if debt continues to decline at the current pace. At the current rating category, a downgrade is not contemplated as there is ample flexibility to withstand any pressures from a deterioration in operating outlook or a sharp increase in debt levels.

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). 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).

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’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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