TEXT-S&P affirms York University 'AA-' ratings on strong demand
Overview -- We are affirming our AA-' long-term issuer credit and senior unsecured debt ratings on York University. -- The ratings reflect our view of the institution's continuing strong enrollment demand and good student quality profile, fairly stable government funding and support, and manageable debt burden. -- The stable outlook reflects our expectations that York will continue to receive stable government support, continue to increase enrollment in line with its targets, and manage its budget such that operating deficits do not materially exceed current expectation within the two-year outlook horizon. Rating Action On Dec. 13, 2012, Standard & Poor's Ratings Services affirmed its 'AA-' long-term issuer credit and senior unsecured debt ratings on York University, in Toronto. The outlook is stable. Rationale The ratings on York reflect Standard & Poor's view of the institution's continuing strong enrollment demand and good student quality profile, fairly stable government funding and support, and manageable debt burden. In our view, York's recent history of consolidated deficits, its relatively small endowment, and rising postemployment liabilities constrain the ratings. The university continues to enjoy strong enrollment demand and good student quality metrics. In 2011-2012, its total enrollment stood at about 48,300 full-time equivalents (FTEs), with about 90% in undergraduate programs. The quality of secondary school registrants has generally improved, with total registrants with entering grades higher than 80% reaching 58% in fall 2010, up significantly from 41% in 2000. This improved student quality gives York greater flexibility to select students whose program choices are aligned with the university's goal of expanding its research profile. Furthermore, demographic projections suggest that there will be a considerable need for additional postsecondary spaces in the Greater Toronto Area in the coming decade. York receives about 38% of its total revenues in the form of operating grants from the Province of Ontario (AA-/Negative/A-1+). We believe this demonstrates solid government funding support. In addition to a base per FTE operating grant, the province also has a history of providing additional grant envelopes for alleviating operating and capital pressures. Although Ontario is facing significant fiscal challenges as it attempts to rein in a C$14 billion deficit, we believe that postsecondary education will remain a top priority for the province and that overall support for the university sector will remain fairly stable. York's debt stood at C$307 million at fiscal year-end 2012 (April 30) and has gradually declined since its most recent debenture issue in fiscal 2005. The debt level equaled 32% of adjusted revenue in fiscal 2012, which is somewhat higher than that of its peers; but is lower than that of many peers per FTE, at C$6,343. This remains a manageable debt burden, in our view, and the university does not plan to issue debt within our two-year outlook horizon. York's debt service coverage ratio (DSCR) improved slightly to 2.3x (principal and interest) on gradually decreasing interest expenses and lower debt repayments. Although this remains slightly weaker than that of its peers, we do not believe that the DSCR will fall below 2.0x within the next two years. York's operating performance has weakened, with the university posting slight accrual deficits, before transfers from internally restricted reserves, for the past five fiscal years. This reflects the difficult operating environment that universities are in with government grants being pressured, rising wages and benefits, inflationary effects, and a tuition framework that limits revenue flexibility. Despite this, York has managed to increase revenue from student fees through continued FTE growth, and in particular growth in international students and other unregulated programs. Management has projected a very slight surplus in its operating budget in fiscal 2013 and small operating deficits in the following two years of about 1%, although on an adjusted basis (removing certain noncash items), we believe that consolidated surpluses before interest expenses will remain above 4% of total revenue. Although York's pension assets continue to recover from the market turmoil of 2009, low returns and decreases in the discount rate assumption have resulted in significant increases in the unfunded liability position of the plan. At fiscal year-end 2012, the solvency deficit was C$391 million, up from almost C$273 million the year before. Although we expect that the university's going-concern payments will increase during our forecast horizon, Ontario has put in place new pension funding regulations, under which institutions that submit and adhere to pension sustainability plans receive a three-year solvency exemption period (until September 2015), followed by a lengthened solvency deficit amortization period of 10 years, up from five. The market value of York's endowment was C$333 million in April 2012, down slightly from the previous year on poor market returns but up significantly from C$245 million in 2009. Despite this improvement, the endowment remains fairly low compared with that of peers in the 'AA' rating category, at about C$6,900 per FTE. About C$41 million of book-value endowments are internally restricted. Adding these to its internally restricted net assets, the university has C$157 million in unrestricted financial resources, enough to cover about 51% of debt, a level slightly below that of its similarly rated peers. Outlook The stable outlook reflects our expectations that York will continue to receive stable government support, continue to increase enrollment in line with its targets, and manage its budget such that operating deficits do not materially exceed current expectation within the two-year outlook horizon. We could revise the outlook to negative or lower the ratings if government grants were to diminish significantly, budgetary performance weakened such that the DSCR fell to less than 2.0x, or the university issued enough debt to push debt-to-adjusted revenues past 40%. Although we view the likelihood of an upgrade as unlikely given that our rating on York is the same as that on Ontario, a significant improvement in operating performance through higher-than-expected government grants and greater tuition flexibility, along with a meaningful rise in unrestricted financial resources and a leveling off of the growth of unfunded postemployment liabilities, could lead us to revise the outlook to positive. Related Criteria And Research -- Principles Of Credit Ratings, Feb. 16, 2011 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 -- USPF Criteria: Higher Education, June 19, 2007 Ratings List Ratings Affirmed York University Issuer credit rating AA-Stable/-- Senior unsecured debt AA- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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