DBRS Morningstar Confirms Ratings on Carleton University at AA (low)

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debenture rating of Carleton University (the University or Carleton) at AA (low). Both trends are Stable. 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 a 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 the University is well positioned to be able to weather a challenging operating environment and that any softening in operating results will be temporary.

Carleton has a track record of sound fiscal management and strong operating performance. Over the past five years, consolidated surpluses have averaged 11.2% of revenues. For 2021–22, the University expects a deficit of $17.8 million compared with a surplus in prior years because of the planned use of prior year reserves for additional renovation and deferred maintenance expenses and the absence of extraordinary investment returns compared with the previous year. Although the flow-through from the softness in first-year intakes in 2020–21 did weigh on revenues, growth in summer 2021 enrolments and retention of existing students provided an offset. With return to campus and increased campus activity, the University expects to post a surplus of $1.2 million for its ancillary operations during F2022, which provides some upside to the operating outlook.

For 2022–23, a balanced budget has been presented, with revenues to be supported by an increase in international tuition fees, which is expected to offset the anticipated decline in enrolments, while fees for domestic regulated programs remain frozen. Over the medium term, declining enrolment will affect operating results as lower first-year intakes in 2021–22 work their way through the system; however, DBRS Morningstar expects the impact to be manageable and consolidated results to be at least balanced, if not show a slight surplus.

The University issued senior unsecured debentures amounting to $220 million during 2021–22, with the proceeds to be used to support the capital plan. Following the issuance and amortization of existing debt, long-term debt totalled $274.9 million at April 30, 2022, or $9,351 per full-time equivalent (FTE) student, up from a very modest $1,849 per FTE student. Despite expectations that FTE enrolment will fall over the next few years, the amortization of existing debt should result in a declining debt per FTE ratio, approaching $9,000 by 2024–25, in line with DBRS Morningstar’s prior expectations.

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
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929.

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

The principal methodology is Rating Public Universities (May 5, 2022; https://www.dbrsmorningstar.com/research/396438). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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.

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