DBRS Morningstar Changes Trends on Huron University College to Negative from Stable, Confirms Ratings at BBB (low)

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of Huron University College (Huron or the University) at BBB (low). DBRS Morningstar also changed the trends on both ratings to Negative from Stable.

The rating is supported by Huron's position as an elite, primarily undergraduate liberal arts institution with strong demand for its niche programs and the profile and operational benefits of its affiliation with a larger, well-recognized university—the University of Western Ontario (UWO). However, historically weak operating performance, lack of internal liquidity (partially mitigated by a debt service reserve), and elevated debt levels constrain the rating.

The Negative trend reflects DBRS Morningstar's view that Huron's efforts to return the University to a sustainable fiscal path appear to be delayed. International enrolment has not grown at the rate anticipated, while moderately higher interest costs, capital cost escalation, and project delays present uncertainty regarding the expected timing of a potential turnaround in operating performance and debt reduction.

On a consolidated basis, the University budgeted for a deficit of $6.6 million in 2022–23, a weaker outlook than previously anticipated by DBRS Morningstar. Based on the third-quarter update, performance is tracking close to plan. Enrolment continues to grow with full-time equivalents (FTEs) expected to increase by 5.5% year over year; however, this remains behind plan and revenues have been negatively affected by changes in enrolment composition. International enrolment continues to be affected by visa processing delays, which has only been partly mitigated by stronger domestic enrolment. Huron has implemented cost-mitigation efforts to offset the shortfall in budgeted revenue.

Over the medium term, Huron forecasts a gradual improvement in operating results, eventually reaching a surplus position by 2026–27. This assumes average annual enrolment growth of 5.0% between 2021–22 and 2026–27 (primarily international), completion of a new residence by fall 2024, stable government grants, and only modest expenditure growth.

Slower enrolment growth is also leading to a slower pace of debt reduction. DBRS Morningstar expects debt to trend downward approaching $46,000 per FTE by 2026–27, compared with $43,000 per FTE previously.

RATING DRIVERS
Changing the trend to Stable from Negative would be dependent on clear improvement key financial risk assessment metrics, with declining operating deficits, improving interest coverage, and visibility regarding the pace and magnitude of debt reduction. A negative rating action could arise from a failure to demonstrate meaningful improvement in financial risk metrics, namely improved operating performance and interest coverage.

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 (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/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.

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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