DBRS Morningstar Confirms McMaster University at AA with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed McMaster University’s (McMaster or the University) Issuer Rating and Senior Unsecured Debt rating at AA. All trends remain Stable. The ratings are supported by McMaster’s strong academic profile, track record of strong financial management, and considerable financial flexibility as evidenced by a large pool of expendable resources. However, a constrained funding and tuition environment, combined with expectations for modestly lower enrolment and prior increases in debt, leave limited capacity within the current ratings to withstand unforeseen shocks.

McMaster reported a consolidated surplus of $52.9 million, or 4.4% of revenues in 2021–22. This compares with a prior-year surplus of $232.0 million, with the year-over-year deterioration mainly driven by a 5.4% investment loss stemming from global market volatility. This follows a positive investment return of 26.1% in 2020–21.

McMaster's budgetary performance is expected to remain strong. The consolidated budget projects a surplus of $121.3 million in 2022–23, followed by surpluses of $129.6 million and $144.6 million in the following two years. DBRS Morningstar notes McMaster has a practice of using conservative budget assumptions and seeks to meet or exceed targets. McMaster has conservatively planned for a reduction in full-time equivalent (FTE) enrolment, averaging 1.2% annually from 2022–23 through 2024–25. This reflects the University's objective to reduce domestic undergraduate enrolment to be in-line with its funded corridor, and McMaster’s current view on international student access to study in Canada. As a result, higher international enrolment and domestic graduate enrolment will only provide a partial offset.

With no new debt anticipated in the near term, McMaster's debt is expected to decline gradually as a small piece of bank debt continues to amortize. For 2022–23, total debt is expected to be $419.2 million. However, when combined with lower enrolment, debt per FTE is forecast to rise to $11,988 per FTE in 2022–23, and approaching $12,300 per FTE by 2024–25. DBRS Morningstar anticipates McMaster will outperform its enrolment targets, leading to more favourable debt-per-FTE metrics.

RATING DRIVERS
Should debt per FTE rise materially above $12,000 on a sustained basis, this could result in downward pressure on the ratings. A negative rating action could also arise from a sustained deterioration in operating performance. A positive rating action, though unlikely, could result from an upgrade of the provincial funder rating, an improvement in the government funding and tuition frameworks, and/or material reduction in debt.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) 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 (May17, 2022).

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

The principal methodology applicable to the rating is Rating Public Universities (May 5, 2022; https://www.dbrsmorningstar.com/research/396438).

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.

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.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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