U of T earns AA grade from DBRS
Chances are there were a few smiles in the upper echelons of the University of Toronto on Wednesday.
The reason was not because the university won a new award or received a major donation. Instead it was something more basic: one of Canada’s leading universities had its credit rating affirmed by DBRS, one of the country’s three major rating agencies.
DBRS, which 40 years back was the first rating agency formed outside of the U. S., confirmed that the U of T would get by with an AA rating for its senior unsecured debentures. Such an affirmation is important because a rating and the trend around that rating can affect the interest rate a borrower is required to pay. U of T was the first university in Canada to enter the public markets more than 15 years back. Since then more than a dozen universities have raised debt capital in the public markets.
“The ratings continue to reflect the University’s exceptional academic profile, strong enrolment outlook and effective financial management practices, which have translated into positive operating results and a strong balance sheet,” DBRS said, noting that the university’s two main negatives were “large pension and post- retirement benefit liabilities,” and a “revenue model” constrained by “provincial policy decisions pertaining to operating grants and tuition fees.”
Overall, DBRS expects U of T to have a lower debt burden per s t udent in 2019-20 compared with today.
The university is part of a wider group of Canadian issuers that have been either rewarded, or maintained their ratings, for adequately managing t heir balance sheet this year.
According to an analysis done by DBRS since the start of the year, of the 216 public ratings it has reviewed, six issuers have been upgraded ( three of which are Ontariobased universities, though none now enjoy a rating equal to U of T), and 12 have been downgraded, with the downgrades affecting the consumer sector ( Aimia Inc. and Sobeys owner Empire Co. Ltd.), energy ( Cenovus Energy Inc. and Inter Pipeline Ltd.), real estate ( Cominar REIT) and utilities ( TransAlta Corp. and Capital Power Corp.). The other 198 have had their ratings confirmed.
The outlier award goes to Home Trust Co. and Home Capital Group Inc., which were affected by multiple rating changes: both were downgraded three times, as the embattled mortgage lender worked faced liquidity issues.
Getting to those overall numbers takes a little figuring out, said Eric Beauchemin at DBRS.
The reason: of the issuers rated by DBRS, 518 have been subject to a rating change this year. But there is overlap as there are more ratings than issuers: The Canada Pension Plan Investment Board, for example, has 16 ratings, a reflection of the number of markets in which it operates and the variety of terms over which it borrows. DBRS gets to 216 by eliminating the duplication.
But to show that the situation in 2017 is different from what prevailed last year, another rating agency, S& P Global noted in a report Wednesday the country’s oil and gas sector was responsible for the largest number of corporate defaults in seven years.
There was a deterioration in the credit quality of the Canadian companies that it rates, S& P said in its report. “Ratings were less stable and downgrades increased, resulting in a downgradeto-upgrade ratio of 2.85 to 1, which was the highest since 2003,” it said. Last year there were nine defaults, all of which were rated non- investment grade.
Indeed as an indication of the carnage that’s occurred in the oil and gas sector, both here and internationally, almost half of the local companies are rated by S& P as speculative grade (BB+ or lower) versus about 30 per cent five years earlier.