DBRS Morningstar Confirms University of Toronto at AA, Stable Trend

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 credit profile is further supported by the University’s fundraising capabilities, resulting in one of the largest endowments among DBRS Morningstar-rated public universities, which provides the University with additional flexibility to weather the challenging operating environment.

In 2021–22, the University reported a surplus of $416 million, or 10.9% of revenues, compared with a surplus of $726 million, or 18.2% of revenues, in the previous year. The decrease was driven by lower investment returns and increased spending across all categories to support capacity expansion stemming from the substantial growth in enrolments over the past few years and return to campus.

The University continues to present a balanced operating budget for 2022–23, with the deficit from ancillary activities to be bridged using prior-year surpluses. As indicated by the latest statistics from the Ontario Universities’ Application Centre for undergraduate students, the fall 2022 enrolment outlook appears to be sound, with total applications up by 3.2%, primarily from in-province students. Over the medium term, U of T expects the student mix to be relatively stable with modest enrolment growth driven by a combination of international and domestic students. The University has gradually increased on-campus learning and is preparing for mostly in-person course delivery in fall 2022 and is forecasting a full-time equivalent (FTE) enrolment growth of 1.4% over the next five years. However, DBRS Morningstar recognizes that ongoing uncertainty around student mobility remains, resulting from visa processing delays, hesitation regarding further additional coronavirus pandemic waves and the potential for the reintroduction of public health measures.

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 will fall below $7,800 per FTE student by F2026 from $8,269 in 2021–22.

U of T is solidly placed at the current rating category, and DBRS Morningstar does not expect the ratings to change 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. Conversely, and also unlikely, a positive rating action could result from a significant reduction in debt-per-FTE combined with an improvement in the government funder rating and material improvement in the funding and tuition fee framework.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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), 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 (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 did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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