Credit Opinion: University of British Columbia

Transcription

1 Credit Opinion: University of British Columbia Global Credit Research - 17 Dec 2014 British Columbia, Canada Ratings Category Outlook Issuer Rating -Dom Curr Senior Unsecured -Dom Curr Moody's Rating Stable Aa1 Aa1 Contacts Analyst Phone Kathrin Heitmann/Toronto Michael Yake/Toronto David Rubinoff/London Key Indicators University of British Columbia (Year Ending 3/31) Total Enrolment (FTE) 45,815 47,157 48,626 50,149 50,746 Provincial Funding as a % of Revenue [1] Net Tuition as a % of Revenue [1][2] Interest Expense as a % of Revenue [1] Funds From Operations as a % of Revenue [1] Net Debt as a % of Revenue [1] Net Cash and Investments/Net Debt (x) [1] Revenue is net of scholarship expenses and adjusted to smooth investment returns. [2] Tuition fees are net of scholarship expenses. Opinion SUMMARY RATING RATIONALE The University of British Columbia (UBC)'s Aa1 ratings benefit from (1) the university's strong market position evidenced by robust student demand, its strong academic reputation and extensive research activities; (2) its consistent track record of positive operating surpluses as well as (3) low debt, a large endowment and solid liquidity that provide balance sheet strength and financial flexibility. The rating also reflects the challenge for UBC to continuously find cost efficiencies in order to mitigate cost inflation for salaries and benefits as well limitations on revenue growth as a result of stable government grants and provincial caps on tuition fee increase for domestics students. In addition, reduced provincial funding for capital projects has required UBC to adjust its capital plan over recent years. Credit Strengths

2 - Strong market position supported by research activities and excellent academic reputation - Focus on international students will continue to bolster revenue growth - Low debt burden, strong liquidity profile and endowment provide balance sheet strength - Sound governance and management practices Credit Challenges - Persistent operating budget pressures due to cost inflation and regulations that limit revenue growth - Limited provincial funding for capital projects Rating Outlook The rating outlook is stable. What Could Change the Rating - Up A sustained increase in UBC's liquidity and reduction in debt, combined with continued positive operating performance, could apply upward pressure on the university's rating. What Could Change the Rating - Down Sustained deterioration in financial performance and/or sustained losses in the asset value of the university's endowment, leading to a material deterioration of the university's financial profile, could exert downward pressure on the university's ratings. Issuer Profile UBC is one of Canada's largest and most high-profile universities, benefitting from a strong international reputation as a comprehensive teaching and research institution. UBC has over 50,000 full-time equivalent (FTE) students enrolled across 12 faculties and 11 schools, including Arts, Science, Applied Science, Business, Forestry, Medicine, Dentistry and Law. The University has two campuses; the Point Grey campus located west of downtown Vancouver, and the Okanagan campus in Kelowna, located in British Columbia's Southern Interior. Since opening in 2005, the Okanagan campus has been the site of rapid expansion. The Province of British Columbia currently exercises a considerable degree of control over its universities, and UBC derives its authority from the University Act of the province. UBC is governed by a board of 21 governors, 11 of whom are appointed by the government (including two who are appointed from a selection of persons nominated by the alumni association). Under the University Act, borrowing requires provincial approval and is only permitted for capital acquisitions. Currently the province prohibits universities from incurring new debt and imposes also restrictions on tuition fee growth. DETAILED RATING CONSIDERATIONS UBC's rating combines (1) a baseline credit assessment (BCA) for the entity of aa1, and (2) a high likelihood of extraordinary support coming from the Province of British Columbia (Aaa negative) in the event that the entity faced acute liquidity stress. Baseline Credit Assessment STRONG MARKET POSITION SUPPORTED BY RESEARCH ACTIVITIES AND EXCELLENT REPUTATION UBC has a strong market position evidenced by solid student demand, its academic reputation as well as extensive research activities. The strong domestic and international reputation of the university for both teaching and research, as well as the large catchment area of the Kelowna region in addition to Vancouver and introduction of liaison offices abroad, should continue to support the robust student demand and market position of the university. Similar to other universities, UBC faces competition for international students as well as research funding and academic staff. In fiscal year , UBC enrolled 50,746 full-time equivalent (FTE) students; a modest increase of 1% over the previous year. Approximately, 83% of FTE students were undergraduates. UBC's selectivity ratio remained stable

3 at around 50% of applicants being accepted. UBC has a strong research program and is among Canada's leading universities in terms of securing research funding. It maintains a large research portfolio with CAD564 million in research funding received in for over 8,400 projects with some concentration on Medicine, Science and Applied Science. The majority of sponsored research is derived from the federal government which however, does not cover any indirect costs of research. The provincial government recently published its BC' Skills for Jobs Blueprint which outlines the provincial government's plan to refocus education on high demand jobs. By , twenty-five per cent of provincial operating grants to public post-secondary institutions will be aligned with training that matches with high-demand occupations and jobs. We expect that UBC will be able to fulfill this requirement. FOCUS ON INTERNATIONAL STUDENTS WILL CONTINUE TO BOLSTER REVENUE GROWTH Similar to other universities, UBC has been focused on increasing the share of international students over the last few years. International students currently comprise around 10.5% of the student population, which compares to around 6.5% in The share of international students excludes international exchange students and graduate students. UBC and other universities in British Columbia, as well as in other Canadian provinces, can generate higher tuition revenues with international students, because caps on increases in tuition fees do not apply to international students. This has supported a 5-year CAGR for tuition revenue of 8% for the period In the university has welcomed its inaugural class to Vantage College, a new integrated academic unit of the university. Vantage College provides a college bridge program for first-year international students from domestic school systems in emerging markets in order to facilitate the transition to university programs and to provide English language support. Through Vantage College, the university seeks to attract more international students. LOW DEBT BURDEN, STRONG LIQUIDITY PROFILE AND ENDOWMENT PROVIDE BALANCE SHEET STRENGTH UBC's debt burden is low (17.8% of adjusted revenues as of March 31, 2014, CAD374 million net direct debt as of March 31, 2014), supporting strong debt metrics and coverage ratios. The provincial government currently restricts the universities from borrowing additional debt. We do not expect any new debt issuance over the next 18 to 24 months. UBC does not have any pension liabilities as it administers a defined contribution plan as well as a hybrid plan that limits the amount the university has to pay. UBC's net cash and investments, which exclude externally restricted endowments and the unspent portion of debenture proceeds, totalled CAD896 million at March 31, This level of cash and investments provides the university with a solid liquidity cushion and increases balance sheet strength. It currently covers 2.4x of net debt and 44% of adjusted expenses excluding expenses for scholarships. At March 31, 2014, the university's endowment assets totalled CAD1.3 billion, up 13.3% from The spending rate of the endowment fund is set at 3.5% plus allowances for administrative costs and inflations. UBC also benefits from a unique provision in the University Act which allows the university to lease the extensive undeveloped lands adjoining its Vancouver campus to developers via pre-paid 99-year leases. The net proceeds generated from these leases are allocated to UBC's endowment. While a moderation in residential development can lead to lower proceeds from land development, recent proceeds have remained robust along with exceptional growth over the last few years. The university continues its CAD1.5 billion fundraising campaign, which will end in Since September 2011, the university has raised CAD1.3 billion. Of the total, 45% came from individuals, 23% from foundations, 15% from corporations and 17% from other organizations. With the large alumni base, strong international reputation and focused fundraising strategy, we expect the university to have continued success in its fundraising activities. SOUND GOVERNANCE AND MANAGEMENT PRACTICES The success of UBC in maintaining a strong balance sheet, while meeting academic goals, is underpinned by the development and execution of a multi-year institutional strategic plan that charts the institution's strategic, academic, and financial course over the medium-term. This strategic plan identifies specific performance benchmarks and facilitates the development of operating and capital budgets, allowing for pressures to be identified and addressed early.

4 UBC's Board of Governors is responsible for the management, administration and financial affairs of the university, including the appointment of senior officials and faculty on the recommendation of UBC's president. Academic governance is vested in two senates (one on each of the Vancouver and Okanagan campuses) that work with the board. UBC's academic mission is clearly articulated and the board possesses the tools necessary to oversee and monitor management's activities effectively. PERSISTENT OPERATING BUDGET PRESSURES DUE TO COST INFLATION AND REGULATIONS THAT LIMIT REVENUE GROWTH UBC has a strong track record of generating modest positive operating surpluses. The university had an average 3-year operating margin of 3.2% in the period and of 2.1% in We expect UBC will be able to post similar results going forward. Cost inflation for salaries and benefits combined with slow tuition revenue growth for domestic students and fairly stable operating grants will however require continued efforts to find cost efficiencies in order to maintain positive operating surpluses. In revenue increased by 2% while expenditures increased by 4% year-over-year. Costs for salaries and benefits account for approximately 63% of UBC's adjusted annual expenditures. In order to remain competitive with other top universities and attract academic talent, the university will continue to face upward pressure on costs for salaries and benefits. Revenue growth is limited by provincial government's restrictions that cap annual tuition fee increases at 2% for domestic students. A 8% increase in tuition fee revenue in has been largely supported by higher tuition fees from international students. LIMITED PROVINCIAL FUNDING FOR CAPITAL PROJECTS The university has needed to modify its capital plan in recent years as the provincial government has reduced its overall funding of projects as part of its expenditure restraint. UBC's current capital plan for the next five years 2014/ /19 includes projects valued at about CAD393 million. The university has requested government funding for around two-thirds of these expenditures and the remainder is planned to be funded internally or through fundraising. The capital plan focuses on the construction of new buildings as well as addressing deferred maintenance and seismic upgrades. The capital plan does not include student residences as these are typically not funded by the provincial government. However, with the increase in the student population, and the lack of nearby off-campus housing combined with high property values in Vancouver, the university has undertaken numerous student housing projects in the past few years and continues with its plan to increase by 2,500 the number of beds on campus by The five-year housing strategy is underway with the CAD167 million Ponderosa housing hub, a key component of the plan, which is scheduled to be completed by Extraordinary Support Considerations Moody's assigns a high likelihood that the Province of British Columbia would act to prevent a default by the university. The high support level reflects a perceived risk to the province's reputation as regulator of the university sector if UBC or any university in British Columbia were to default. Moody's also assigns a very high default dependence between the university and the Province of British Columbia reflecting our assessment of the university's and the province's joint exposure to the impact of prolonged economic shocks. It also reflects the university's reliance on provincial government grants for a sizeable portion of its overall revenues. ABOUT MOODY'S SUB-SOVEREIGN RATINGS National and Global Scale Ratings Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in

5 June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings". The Moody's Global Scale rating for issuers and issues allows investors to compare the issuer's/issue's creditworthiness to all others in the world, rather than merely in one country. It incorporates all risks relating to that country, including the potential volatility of the national economy. Baseline Credit Assessment Baseline credit assessments (BCAs) are opinions of entity's standalone intrinsic strength, absent any extraordinary support from a government. Contractual relationships and any expected ongoing annual subsidies from the government are incorporated in BCAs and, therefore, are considered intrinsic to an issuer's standalone financial strength. BCAs are expressed on a lower-case alpha-numeric scale that corresponds to the alpha-numeric ratings of the global long-term rating scale. Extraordinary Support Extraordinary support is defined as action taken by a supporting government to prevent a default by a Government Related Issuer (GRI) and could take different forms, ranging from a formal guarantee to direct cash infusions to facilitating negotiations with lenders to enhance access to needed financing. Extraordinary support is described as either low (0-30%), moderate (31-50%), strong (51-70%), high (71-90%) and very high (91-100%). Default Dependence Default dependence reflects the likelihood that the credit profiles of two obligors may be imperfectly correlated. Such imperfect correlation, if present, has important diversifying effects which can change the joint-default outcome. Intuitively, if two obligors' default risks are imperfectly correlated, the risk that they would simultaneously default is smaller than the risk of either defaulting on its own. In the application of joint-default analysis to GRIs, default dependence reflects the tendency of the GRI and the supporting government to be jointly susceptible to adverse circumstances leading to defaults. Since the capacity of the government to provide extraordinary support and prevent a default by a GRI is conditional on the solvency of both entities, the more highly dependent -- or correlated -- the two obligors' credit profiles, the lower the benefits achieved from joint support. In most cases GRIs demonstrate moderate to very high degrees of default dependence with their supporting governments, which reflects the existence of institutional linkages and shared exposure to economic conditions that draw credit profiles together. Default dependence is described as either low (30%), moderate (50%), high (70%) and very high (90%). This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history 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 INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH

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