DBRS Morningstar Confirms Simon Fraser University at AA (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Simon Fraser University’s (SFU or the University) Issuer Rating and Senior Unsecured Debt rating at AA (low) with Stable trends.

The ratings reflect SFU’s solid academic profile as a leading comprehensive university in Canada, its historically low debt burden, and its favourable location in the Metro Vancouver region. The ratings are constrained by large deferred maintenance needs as well as by limited fee-setting autonomy and funding growth.

For 2021–22, SFU recorded a consolidated surplus of $104.8 million compared with $53.5 million in the prior year. However, the DBRS Morningstar-adjusted operating surplus (before restricted contributions to endowments) for 2021–22 was lower at $27.1 million, compared with $41.3 million in the year prior, as expenses outpaced revenue growth during the year. SFU's budget forecast equates to a DBRS Morningstar-adjusted surplus from operations of $15.2 million, excluding net restricted endowment contributions of $22.4 million for 2022–23. Despite uncertainties around international enrolments, the University expects prior reserves will be sufficient to offset any resulting weakness in revenue. The University's expectations for higher activity on campus also suggest an upside to ancillary operations.

For 2022–23, the University expects a slight decline in graduate enrolments as well as a slight decrease in undergraduate enrolments, primarily driven by lower international enrolments. As indicated by the University’s management, fall-term registrations for domestic students are expected to be better than anticipated, as a result of which overall enrolments are expected to decline by a modest 0.2%. Beyond 2022–23, the enrolment trajectory is expected to recover and the University projects an average annual increase of 1.3% through 2025–26. DBRS Morningstar recognizes that considerable uncertainty may linger around student mobility over the next few years, led by complicated travel and visa rules, ongoing or potential Coronavirus Disease (COVID-19) waves across countries, and the implementation of vaccination plans.

Following the use of the Province of British Columbia's (rated AA (high) with a Stable trend by DBRS Morningstar) lending program to fund Phase 2 of the University's student housing project, SFU’s debt burden increased by $31.0 million to $228.0 million, with debt per full-time equivalent (FTE) rising to $8,375 as at F2022 compared with $7,228 in the previous year—in line with DBRS Morningstar's prior expectations. In the absence of additional borrowing, DBRS Morningstar projects the debt-per-FTE ratio will gradually decline going forward, decreasing to $8,000 per FTE in 2025–26.

RATING DRIVERS
The ratings are solidly placed in the current rating category and a positive rating action is unlikely in the near term, given the outlook for increasing debt and a challenging operating environment. A negative rating action could result from a significant and sustained rise in SFU’s debt burden beyond DBRS Morningstar’s current expectations.

ENVIRONMENTAL, SOCIAL, AND 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 (May 17, 2022).

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

The methodology is Rating Public Universities (May 5, 2022; https://www.dbrsmorningstar.com/research/396438), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 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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