DBRS Morningstar Confirms Concordia University’s Ratings at “A,” Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Concordia University’s (Concordia or the University) Issuer Rating and Senior Unsecured Debt rating at "A." All trends are Stable. The ratings reflect Concordia's academic profile and the high level of support and oversight in post-secondary education exercised by the Province of Québec (Québec or the Province; rated AA (low) with a Stable trend by DBRS Morningstar). The ratings also reflect ongoing budgetary pressures amid an increasingly challenging operating environment and rising debt.

The University's credit profile had been improving prior to the Coronavirus Disease (COVID-19) pandemic. However, the pandemic has resulted in broad-based deterioration of Concordia's financial risk profile, driven by an increasingly challenging operating environment, deteriorating medium-term operating outlook, and rising debt. These factors will erode ratings flexibility; however, DBRS Morningstar believes there is room within the current ratings to absorb anticipated pressures without resulting in a downward rating action.

In 2021–22, Concordia reported a consolidated deficit of $31.3 million, relative to the $21.0 million shortfall in the prior year. Although Concordia demonstrated spending prudence, expense growth continued to outpace revenues.

For F2023, the University has budgeted an operating deficit of $15.0 million. The University anticipates that provincial funding will remain a key source of revenue, representing more than 50% of total revenue. As at second quarter F2023, results were largely in line with the base budget, although the University noted ongoing pressures resulting from the pandemic, among other challenges. For fall 2023, Concordia anticipates a second consecutive year of declining total enrolment, in line with the broader provincial university sector given adverse demographic trends within Québec.

Operating budget deficits will likely linger over the medium term. Despite the Province providing some nonrecurring conditional grants, overall funding levels are largely unchanged. Concordia will address any future deficits through a combination of cost savings, reserve drawdowns/unspent government subsidies, and mainly provincially approved short-term debt. Concordia has indicated that it will access debt for strategic investments and to fund a portion of projected operating deficits over the medium term. This differs from the practice at most other DBRS Morningstar-rated universities where debt financing is used for capital purposes only.

Over the medium term, DBRS Morningstar estimates that University-supported debt-to-full-time equivalent students could increase to more than $18,000. However, Concordia has indicated to DBRS Morningstar that actual capital spend—and university-supported debt financing—will likely be lower than forecast, and the University will continue to prioritize long-term operating and financial sustainability.

RATING DRIVERS
The ratings are placed solidly in the current "A" rating category. DBRS Morningstar could contemplate a positive rating action if the University is able to demonstrate effective deficit reduction strategies, rebuild expendable resources as calculated by DBRS Morningstar, or if debt growth is meaningfully lower than expected over the medium term. A negative rating action could result from a weakened outlook on funding and tuition frameworks, sustained deterioration in operating results, and/or increased debt levels materially beyond current expectations.

ENVIRONMENTAL, SOCIAL, GOVERNANCE 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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.

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 had 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.

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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