DBRS Morningstar Confirms Ratings of Brock University at A (high) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Brock University (Brock or the University) at A (high) with Stable trends. The ratings are underpinned by the University's position as a midsize comprehensive university in the Province of Ontario (rated AA (low) with a Stable trend by DBRS Morningstar), supportive enrolment outlook, and relatively strong financial risk assessment (FRA) metrics. The ratings remained constrained by the current challenging operating environment, constrained funding and tuition fees, and international student visa backlogs.

In 2021–22, Brock reported a consolidated surplus of $2.8 million, including a one-time gain related to the sales of its Hamilton Campus in Hamilton, Ontario, and other assets. Excluding the gain from the sale of assets, this equates to a deficit of $0.5 million, a decline from the prior year’s surplus of $5.2 million. The deterioration was driven by a very modest decline in enrolment combined with stable operating grants and frozen domestic tuition fees, which resulted in expense growth outpacing that of revenue. Additionally, pandemic-related funding support from the Province provided in the previous year was not repeated. Despite weaker-than-planned enrolment, Brock continues to demonstrate strong and responsive management of University finances.

Brock’s second-trimester financial update covers the period ended December 31, 2022, and points to a balanced result on a funding basis and a deficit of $9.8 million on a consolidated financial statement basis for 2022–23. Revenues continue to be hampered by the pandemic, with student fee income estimated to be down $16.5 million on a funding basis, or 8.1%, relative to the budget, driven by expected declines in international student enrolments as delays in processing study permits persist. The resumption of on-campus learning is supporting the continued recovery in ancillary revenues. Brock realized savings of $11.7 million on personnel costs through ongoing cost mitigation strategies with a remaining mitigation target of $0.3 million for 2022–23.

Over the medium term, DBRS Morningstar expects management to continue to target a balanced budget each year (on a funding basis), as mandated by Brock’s board of trustees. Despite the lingering effects of the pandemic, this target has not been altered. With stable operating grants and frozen tuition fees, annual revenue growth typically falls short of annual expense growth, necessitating mitigation targets each year.

University debt totalled $263.2 million at April 30, 2022, a year-over-year decline of 0.8%, reflecting the amortization of existing debt. Moreover, relatively flat operating results and interest costs resulted in interest coverage remaining unchanged at 3.0 times (x) in 2021–22. In 2021–22, debt per full-time equivalent student (FTE) was $12,136, relatively unchanged from the prior year. In the absence of new debt, DBRS Morningstar expects debt per FTE to fall below $12,000 in 2022–23 and continue falling to approximately $10,200 per FTE by 2024–25.

RATING DRIVERS
A positive rating action depends on sustained improvement in FRA metrics and an improvement in DBRS Morningstar's assessment of one or more critical rating factors. While unlikely, a negative rating action could arise from a significant and sustained deterioration in operating results or from a material increase in debt.

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 (May 17, 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).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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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