DBRS Morningstar Confirms Ratings on University of Toronto at AA, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debentures rating of the University of Toronto (U of T or the University) at AA with Stable trends. The ratings reflect the University’s exceptional academic profile, strong student demand, and effective financial management practices, despite the current challenging operating environment, which allows limited revenue flexibility along with rising costs and a somewhat uncertain outlook for enrolments. The credit profile is further supported by the University’s fundraising capabilities, resulting in one of the largest endowments among DBRS Morningstar-rated public universities, which provides the University with additional flexibility to weather the challenging operating environment.

The University reported a surplus of $551 million in 2022–23, or 12.9% of revenue, compared with a surplus of $416 million, or 10.9% of revenue, in the previous year. The increase was largely driven by higher investment returns along with increases across tuition fee revenue and recovery in ancillary operations.

The University continues to present a balanced operating budget for 2023–24, and any lingering deficits from individual ancillary units will be offset using prior-year reserves. As indicated by the latest statistics from the Ontario Universities' Application Centre for undergraduate students, the fall 2023 enrolment outlook appears to be sound, with total confirmations up by 2.5%, primarily from out-of-province students. The University forecasts an average enrolment growth of 1.8% over the next five years. Although the international enrolment outlook still remains somewhat uncertain, DBRS Morningstar believes the easing of visa processing related issues and U of T's continued academic strength and strong demand suggest the enrolment outlook for the University will remain in line with its budgetary targets.

The strength of U of T’s balance sheet and its effective approach to capital budgeting preclude the need for material new borrowings in the near term. As such, DBRS Morningstar projects the University’s debt burden will fall below $7,600 per full-time equivalent (FTE) student by F2027 from $8,216 in 2022–23.

RATING DRIVERS
U of T is solidly placed at the current rating category, and DBRS Morningstar does not expect the ratings to change given the University’s exceptionally strong financial ratios and prudent fiscal management. Though unlikely, a negative rating action could result from a significant and sustained deterioration in operating results, leading to a substantially weakened balance sheet. Conversely, and also unlikely, a positive rating action could result from a combination of significant reduction in the debt-per-FTE ratio, an improvement in the government funder rating, and material improvement in the funding and tuition fee framework.

ENVIRONMENTAL, SOCIAL, AND 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Rating Public Universities (May 17, 2023; https://www.dbrsmorningstar.com/research/414148)

The credit 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 credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this rating action.

DBRS Morningstar did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit 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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