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University of Ontario Institute of Technology -- Moody's affirms ratings on six Ontario universities but lowers assumption of extraordinary support

·19 min read

Rating Action: Moody's affirms ratings on six Ontario universities but lowers assumption of extraordinary supportGlobal Credit Research - 22 Feb 2021Toronto, February 22, 2021 -- Moody's Investors Service, ("Moody's") today affirmed the ratings and maintained the outlooks unchanged of six Ontario universities. At the same time, Moody's lowered its assumption of the level of extraordinary support that the Province of Ontario provides to these entities. Moody's also affirmed the baseline credit assessments (BCAs) of all universities. Today's rating action follows the filing for creditor protection under the Companies' Creditors Arrangement Act by Laurentian University, a public university (not rated by Moody's) in the province. Outlook Actions: ..Issuer: Lakehead University ....Outlook, Remains Stable ..Issuer: Ryerson University ....Outlook, Remains Stable ..Issuer: University of Ontario Institute of Technology....Outlook, Remains Stable..Issuer: University of Ottawa, Canada....Outlook, Remains Stable..Issuer: University of Toronto....Outlook, Remains Stable..Issuer: University of Windsor ....Outlook, Remains Negative Affirmations: ..Issuer: Lakehead University ....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed A1..Issuer: Ryerson University....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Aa3..Issuer: University of Ontario Institute of Technology....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed A1..Issuer: University of Ottawa, Canada....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Aa2..Issuer: University of Toronto.... Issuer Rating, Affirmed Aa1....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Aa1..Issuer: University of Windsor....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Aa3RATINGS RATIONALERATIONALE FOR LOWERING PROBABILITY OF EXTRAORDINARY SUPPORTToday's action reflects Moody's reassessment of the probability that extraordinary support will be available on a timely basis from the Province of Ontario to universities. In Moody's opinion, the recent filing for creditor protection by Laurentian University suggests an increased risk that the province would allow universities to interrupt payments to creditors ahead of any extraordinary support being provided. It may also suggest weaker regulatory oversight from the province to the higher education sector than previously assumed. Taken together, these factors lessen the credit support available to universities facing financial distress.For the University of Toronto, University of Ottawa, Ryerson University, the University of Windsor and Lakehead University, the level of extraordinary support from the Province of Ontario was lowered to 'moderate' from 'high'. The assumption of moderate support still implies a reasonable probability that the province would assist universities in financial difficulties, but lower than previously assumed.For the University of Ontario Institute of Technology the level of extraordinary support from the Province of Ontario, should it face acute financial difficulties, was lowered to 'high' from 'very high'. The higher probability of extraordinary support in this case reflects the closer linkage to the province created by the debt guarantee provided by Durham College of Applied Arts and Technology (unrated). Colleges in Ontario are consolidated into the province's balance sheet, which tends to entail closer scrutiny by the province. In Moody's view, that suggests a somewhat higher likelihood of extraordinary support for the University of Ontario Institute of Technology than for other universities.RATIONALE FOR AFFIRMING THE RATINGS OF ALL ENTITIESThe review of the extraordinary support assumptions does not change Moody's view of the intrinsic creditworthiness of the six universities. As a result, their BCAs remain unchanged.Nor does the change in support assumptions affect the assigned rating in any case. In the case of the University of Toronto (BCA aa1), University of Ottawa (BCA aa2) and Ryerson University (BCA aa3), the affirmation of their ratings reflects the fact that their respective BCAs are positioned at or above the rating of the Province of Ontario. As a result, the application of the joint default analysis including a 'moderate' level of extraordinary support does not provide additional credit uplift.For the University of Windsor (BCA a1) and Lakehead University (BCA a2), the affirmation of their ratings reflects that even a 'moderate' assumption of extraordinary support from the Province of Ontario continues to allow for one notch of credit uplift from their respective BCAs. Additionally, for the University of Ontario Institute of Technology (BCA a3), its closer ties to the province than the other universities reflected in the revised 'high' level of extraordinary support continue to support a two-notch uplift from its BCA.RATIONALE FOR OUTLOOKSThe maintenance of stable outlooks for the University of Toronto, University of Ottawa, Ryerson University, the University of Ontario Institute of Technology and Lakehead University reflects ongoing intrinsic factors at each university, primarily a continuation of key financial metrics in line with current levels. In Moody's opinion, these universities exhibit sufficient liquidity, financial flexibility and debt affordability to withstand the anticipated pressure stemming from the coronavirus pandemic to maintain key metrics aligned with their respective current ratings.The maintenance of the negative outlook for the University of Windsor reflects continued risk that debt affordability may deteriorate further than currently forecasted following the issuance of debt in February 2020. Given the pressures that the coronavirus pandemic will exert on the university's operating cash flow margin, the recent rise in debt may lead to weaker debt affordability than currently projected, resulting in a rating no longer aligned with Aa3 global peers.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSEnvironmental considerations are not material to Ontario universities.Social considerations are elevated and principally relate in the near term to developments in public policy on education and demographic trends. Moody's also considers the coronavirus pandemic as a social risk which will continue to pressure demand levels throughout the duration of enhanced public safety measures.Governance considerations are material but risks are low given the strong institutional framework and prudent financial planning exhibited by the rated universities.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe University of Toronto could face upward pressure following a sustained period of strong positive operating performance and increasing enrolment numbers, in conjunction with a material increase in endowment and liquidity levels in line with Aaa global peers. The university successfully addressing its unfunded pension liabilities would also contribute to upward pressure on the rating. Conversely, a sustained decline in enrolment demand, including from international students, leading to weaker financial performance including operating deficits, would lead to downward rating pressure. A material decline in liquidity and investment returns would also contribute to downward rating pressure.The University of Ottawa could face upward pressure if it were to record very strong sustained cash flow, improve debt affordability (total debt to cash flow) to below 4x and materially increase liquidity to provide for greater security given the university's revenue stream will be subject to potential greater volatility over the next four years. The rating could face downward pressure if the university exhibits sustained difficulty transitioning to the new provincial funding environment, including sustained levels of total debt to cash flow above 6x, annual change in operating revenue growth below 3x and/ or operating cash flow margin below 10%.Ryerson University could face upward pressure should the university record an improvement in its financial flexibility through the diversification of revenue sources. A faster than anticipated reduction in debt burden or a significant rise in liquidity could also lead to upward pressure on the rating. A sustained deterioration in financial performance leading to operating deficits, a significant increase in the debt burden or a decline in the level of spendable cash and investments could lead to a downgrade in the rating.Lakehead University could face upward pressure if it recorded stronger operating outcomes, as evidenced by sustained strong cash flow generation, improved debt affordability (total debt to cash flow) to below 5x and/or annual change in operating revenue of above 6x through the transitioning period to the new provincial funding framework, could apply upward pressure to the rating. A sustained deterioration in financial performance and difficulty in transitioning to the new provincial funding framework, leading to consecutive negative operating cash flow margins, prolonged negative annual change in operating revenue and/or a material increase in leverage, could lead to downward rating pressure.The University of Ontario Institute of Technology could face upward pressure should the university record a significant improvement in its liquidity profile, as measured by spendable cash and investments. An ability to maintain strong liquidity metrics if debt was required to expand capital, could put upward pressure on the rating as well. Factors that could lead to a downgrade include a significant weakening in operating results with consistent operating deficits, or a decline in liquidity as a result of weaker enrolment levels or a deterioration in expenditure controls.The outlook of the University of Windsor could be stabilized if the university were to demonstrate an ability to adhere to 2020/21 budget outcomes and record positive improvements in 2021/22 in annual change in pricing power and operating cash flow margins. This would demonstrate that the strategic plan, including a strong reliance on international students, is not fundamentally impacted by the coronavirus pandemic. The rating could face downward pressure if the university were to record sustained weakness on revenue growth beyond 2020/21 and continued negative operating margins in 2021/22. The rating could also face downward pressure if wealth and liquidity were to fall.The methodologies used in these ratings were Higher Education published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1175020, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Adam Hardi, CFA Vice President - Senior Analyst Sub-Sovereign Group Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Alejandro Olivo MD-Sovereign/Sub Sovereign Sub-Sovereign Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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