MARCH 13, 2013 SUB-SOVEREIGN CREDIT ANALYSIS Ontario, Canada Table of Contents: RATINGS 1 SUMMARY RATING RATIONALE 1 RATING OUTLOOK 1 WHAT COULD CHANGE THE RATING - UP 1 WHAT COULD CHANGE THE RATING - DOWN 1 ISSUER PROFILE 2 KEY RATING FACTORS 2 RATING HISTORY 6 ANNUAL STATISTICS 7 MOODY S RELATED RESEARCH 11 Analyst Contacts: TORONTO +1.416.214.1635 Michael Yake +1.416.214.3865 Assistant Vice President - Analyst michael.yake@moodys.com Jennifer A. Wong +1.416.214.3854 Assistant Vice President - Analyst jennifera.wong@moodys.com Aaron Wong +1.416.214.3633 Associate Analyst aaron.wong@moodys.com LONDON +44.20.7772.5454 David Rubinoff +44.20.7772.1398 Managing Director - Sub Sovereigns david.rubinoff@moodys.com Ratings Category Outlook Bonds Summary Rating Rationale Moody's Rating Stable The Aa2 rating for the University of Ottawa reflects the university s strong balance sheet, modest debt burden and a history of positive operating outcomes. Although the university has faced growing expenditure pressures within a context of a slower pace of revenue growth, the university s multi-year budgetary process has allowed management the vision required to implement measures to achieve balanced budgets. The rating also reflects the university s strong market position as a research-intensive, medical/doctoral, bilingual university. Rating Outlook The outlook is stable. What Could Change the Rating - Up Increased provincial funding and greater flexibility to set tuition fees, combined with continuing strengthening of the university s balance sheet could, over time, apply upward pressure on the rating. Aa2 What Could Change the Rating - Down This Credit Analysis provides an in-depth discussion of credit rating(s) for University of Ottawa, Canada and should be read in conjunction with Moody s most recent Credit Opinion and rating information available on Moody's website. A loss of fiscal discipline, within a context of slowing revenue growth and sustained upward pressure on salaries and benefits, which leads to sustained deficits could exert downward pressure on the rating. An inability to address the unfunded pension liabilities, which will place more pressure on the university s financial resources, could also place downward pressure on the rating.
Issuer Profile Located in Canada s capital, the University of Ottawa is a bilingual medical/doctoral university giving it a niche market position. The university offers a full range of academic and professional programs in 10 faculties, including Arts, Science, Management, Engineering, Medicine and Law. The university experienced considerable growth in enrolment during the past decade, which also necessitated the undertaking of several significant capital projects on campus. In 2011/12, enrolment surpassed 43,000 full-time equivalent (FTE) students. The University of Ottawa, like other universities in the province of Ontario, was incorporated by an act of the provincial legislature. Key Rating Factors Market Position The University of Ottawa s market position is enhanced by its status as Canada s premier bilingual university as well as a top-rated medical/doctoral institution. The university s official bilingualism does not mean that students have to be bilingual to be admitted, but rather that most courses and programs are offered in both languages, which increases its market to include both Anglophone and Francophone students. Its location in the nation s capital, which is on the border between the provinces of Ontario (predominantly English speaking) and Quebec (predominantly French speaking), also helps to differentiate it from other institutions. The University of Ottawa s student body is approximately two-thirds English-speaking and one-third French-speaking, while three-quarters of the faculty members are bilingual. Research-oriented The University of Ottawa is one of Canada s most research-intensive universities and has notable research programs in several faculties, including Medicine, Science and Health Sciences. Through these faculties, and the relationship the university has with affiliated hospitals, the university has been successful in attracting research funding from the federal government s granting councils and other sources. Research grants and contracts have remained stable over the recent past, equaling C$135.9 million for 2011/12. Provincial funding hinders undergraduate growth Total full-time enrolment has produced an average compound growth rate of 3.7% over the period 2006/07-2011/12. In 2011/12, FTE enrolment reached just under 43,500. While the annual growth rates have remained fairly consistent since 2004/05, a larger share of the growth has come from graduate students, which accounted for 30.4% of the total FTE in 2011/12 compared to 24.2% in 2004/05. The emphasis on graduate students reflects the university s strong research reputation, as well as the provincial government s funding policy which, for practical purposes, has meant the University of Ottawa has reached its steady-state size with respect to undergraduate students. Enrolment growth is therefore expected to moderate over the medium-term and reflect growth in graduate students. Government Relationship Low level of provincial oversight Like other universities in the Province of Ontario, the University of Ottawa was created by a separate act of the provincial legislature. While the province is ultimately responsible, constitutionally, for the delivery of post-secondary education, the University of Ottawa operates at arm's-length from the 2 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
province, as do other Ontario universities. The provincial government establishes broad strategies and targets for each university, provides operating grants and has the authority to control tuition fees, but each university retains autonomy to carry out its activities. While the Ontario Ministry of Training, Colleges and Universities monitors developments at individual universities and demands that universities be accountable, the "hands-off" approach to the university sector in Ontario is unlike that in some other Canadian provinces, such as Quebec, where the level of provincial control and oversight is considerably greater. In our view, this lower level of provincial oversight and monitoring over Ontario universities, in and of itself, would be considered as a credit negative, as it allows for an increase in the likelihood that universities could experience financial difficulties without the province being aware of it. However, this relative independence of Ontario universities is balanced by prudent fiscal management. The University of Ottawa s strong standalone characteristics including strong governance and management mitigate any concerns arising from this approach. Tuition Practices Helped, Future Uncertain Since 2006/07, the province has also allowed individual institutions to increase tuition at their own discretion, to a limit of 5% per year. While tuition increases of this magnitude have not been sufficient to keep pace with rising academic salaries and benefits, the combination of rising government grants and modest tuition increases provided enough flexibility for universities in Ontario to manage pressures and balance their operating budgets. No announcement has yet been made by the Government of Ontario concerning the 2013-14 tuition fee framework. The University of Ottawa has taken into consideration a range of possible tuition increases through their initial 2013-14 budget deliberations while waiting for final confirmation from the provincial government on the tuition framework. Governance and Management As with most Canadian universities, the governance structure of the University of Ottawa is bicameral with responsibilities split between the Board of Governors (management, administration and financial affairs) and the Senate (academic policies and granting of degrees). The Board is composed of 32 members, of which 4 are provincial appointees; other Board members include Senate appointees (2) and Alumni Association members (2). The University of Ottawa s academic mission is clearly articulated and the Board possesses the tools necessary to oversee and monitor effectively management s activities. The university s President has recently had his term renewed until 2016, ensuring stability within the administration of the university. The university s internal financial management policies, including multi-year planning, reflect a fiscally conservative approach ensuring consistency with the university s strategic plan and allowing for pressures to be identified and address early. The Board, on the advice of the university s treasurer and external consultants, makes broad asset allocation decisions with respect to the university s endowment and approves the appointment and removal of external money managers. The portion of the university s working capital not currently needed is also invested by external managers, subject to the university s investment policy for short-term assets. We view this delegation of investment management responsibilities as a credit positive. Prudent Financial Management The University of Ottawa adheres to a Liability Management Policy, which was adopted in 2007. This policy outlines the general philosophy the university should follow in concerns of debt and debt management, as well as establishing specific financial measures the university will adhere to as part of 3 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
the administration s commitment to prudent financial management. We consider the commitment to follow this policy as a credit positive. Operating Performance To meet its targets, the university follows a number of internal policies and controls, including using conservative revenue estimates and expense allocations as well as consistently monitoring departmental activities throughout the year. These policies help ensure that any over-expenditures or revenueshortfalls are identified quickly allowing the university time to address these issues before the fiscal outcome is jeopardized. Positive results continued in 2011/12 These practices have helped underpin the university s annual surpluses and generate positive funds from operations over the past several years, despite facing cost pressures that are prevalent throughout the sector. After adjusting for fluctuations in investment returns and removing scholarships, fellowships and bursaries from both revenues and expenses, adjusted net income was C$46.6 million in 2011/12, equivalent to 5.7% of adjusted revenues, a slight decline from the previous year s results of 6.5% of adjusted revenues. Although the result is still positive, the reduction highlights the growing challenges the university faces in light of expenditure pressures, reduced enrolment growth and possibly lower tuition increases in the future. Overall, in 2011/12 adjusted revenues increased 2.4% while adjusted expenses increased 3.3%. On the revenue side, government grants for operations increased 2.9%, while tuition revenue, which was aided by a combination of the provincial government s allowance for a maximum increase of 5% to overall tuition rates and enrolment growth, grew 10.0%. Grants and contracts, investment income and donations all fell between 2010/11 and 2011/12. On the expenditure side, salaries and benefits, which have been difficult for universities to control, rose 5.1% which was down considerably from the growth rates of the past three years. Although results for 2012/13 are not yet available, information available to date indicate that the university should produce another year of positive operating results, although the downward trend in the size of the surplus is expected to continue. Enrolment in 2012/13 was better than forecasted, with international students reaching the target initially forecasted for 2020, which can be attributed to the greater emphasis the university has placed on recruiting and attracting international students. Enrolment targets for graduate students continue to be met and the share of graduate students continues to increase each year. Debt Profile Low and Declining Debt Burden The growth of the campus infrastructure over the past decade has largely been financed via a C$150 million debenture issued in 2003 and internal funds, leading to a comparatively low debt burden that measured 18.3% of adjusted revenues as of April 30, 2012. The debt burden has declined since the debenture issue in 2003, when it reached a peak of 48.5% of adjusted revenue. Upon issuance of the 30-year debenture, the university created a sinking fund, which had a value of C$23.4 million as of April 30, 2012. As previously indicated, the university adheres to the Liability Management Policy which established guidelines for a number of financial ratios and whose goal is to ensure that debt ratios remain modest as the university considers further debt issuance in support of its capital plan. As part of the policy, 4 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
management must report the current relevant ratios to the Board on an annual basis, including a fiveyear forecast, in order to identify deterioration of the outlook in advance and take appropriate action. The university s current five-year (2012-17) capital plan has projects worth a total of C$127 million. Minimal borrowing is anticipated for the next two to three years, and the university is expected to remain comfortably within the limits as outlined in its Liability Management Policy. We view the adoption of the university s Liability Management Policy as testament to the university s prudent and conservative financial management and as a safeguard against a reversal of its recent improvements in financial position. Pension in Deficit Position The university's pension fund position has deteriorated in recent years, with the university anticipating the emergence of a solvency deficit with its next valuation in addition to a growing unfunded liability. As of April 30, 2012, the unfunded liability measured C$389 million on an accounting basis, up from C$147 million a year earlier. The university will need to increase the level of special payments towards the pension plan and has put in place plans to address its significant unfunded liabilities, including reopening negotiations with its unions to alter the contributions to make the plan more sustainable. The University of Ottawa has applied for the provincial solvency funding relief program, and having developed a plan to make its pension plans more sustainable is confident it will receive Stage 1 approval. If the university were to receive Stage 2 approval (based on actuarial filing date January 1, 2013), this would allow the university to amortize special pension payments required to address the solvency deficiency over 10 years instead of five years starting in 2016. Addressing this significant unfunded position, however, will take several years to resolve and, despite a modest level of reserves in place to help with pensions funding over the immediate future, will involve additional pressures on the university s finances. If Stage 2 approval were not granted, this would put significant pressure on the university s budget as the special payments of C$75 million would be required for five year, starting in 2014. We expect the university will be able to manage these pressures but we will continue to monitor the progress of the university's plan and the success in moving the pension plans to a more sustainable footing. Balance Sheet Strength Financial Assets Provide Security Unlike other institutions that saw their net cash and investments decline following the financial crisis of 2008-09, the University of Ottawa s net cash and investments, which exclude externally restricted endowments and the unspent portion of debenture proceeds, have continuously grown over the past decade. At April 30, 2012, net cash and investments totaled C$563.1 million, an increase of 2.1% from the previous year. This level of net cash and investments represented 3.7 times net direct debt, providing ample liquidity and a measure of security to debenture holders. The university is considering launching a new fundraising campaign in 2014. Given the university s limited past experience with fundraising and large alumni base, untapped potential is considered high and endowment assets are expected to continue their strong growth. Due to low investment returns, many universities in Canada, including the University of Ottawa, have reduced their endowment spend rate to ensure the sustainability of funds. 5 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
Application of Joint-Default Analysis As a reflection of Moody s joint-default analysis (JDA) methodology for government-related issuers, the rating assigned to the University of Ottawa is composed of two principal inputs: a baseline credit assessment of aa2 and a high likelihood that the Province of Ontario (Aa2, stable) would act to prevent a default by the university. A high likelihood of extraordinary support from the province reflects our assessment of the risk to the province s reputation as a regulator of the university sector if the University of Ottawa were allowed to default. The risk of higher borrowing costs for the public sector in Ontario, including the province itself, and the university s significant public policy mandate are other factors supporting our assessment of a high likelihood of extraordinary support. Rating History Date April 2012 November 2008 March 2003 Rating Aa2 Aa1 Aa2 6 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
Annual Statistics Debt Statement (As At 30/04, C$ Millions) 2008 2009 2010 2011 2012 Mortgages, Loans and Capital Leases 54.6 52.9 51.2 49.3 24.1 Debentures 150.0 150.0 150.0 150.0 150.0 Total Direct Debt 204.6 202.9 201.2 199.3 174.1 Less: Sinking funds 13.1 13.1 16.0 19.0 23.4 Net Direct Debt 191.5 189.9 185.2 180.3 150.7 Debt Trends (As At 30/04) Net Direct Debt per Student (C$, per FTE) 5,147 4,946 4,599 4,271 3,466 Net Direct Debt as a % of Revenue [1] 29.1 28.0 25.0 22.5 18.3 [1] Revenue is net of scholarship expenses and adjusted to smooth investment returns. Market Demand Trends Total Enrolment (FTE) 37,207 38,387 40,262 42,217 43,478 Undergraduate Students as a % of Total (FTE Basis) 71.9 69.9 71.0 70.1 69.6 7 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
Statement Of Operations (Year Ending 30/04, C$Millions) 2008 2009 2010 2011 2012 Revenue Government Grants for Operations 283.6 289.4 326.1 364.0 374.6 Tuition Fees 193.2 204.6 226.5 249.4 274.4 Grants and Contracts 144.3 146.3 146.1 147.3 135.9 Investment Income (Loss) 24.8 3.8 37.3 31.7 24.7 Donations 11.2 9.9 12.2 14.7 11.2 Other 48.8 48.1 54.6 54.5 59.2 Total Revenue 705.9 702.1 802.7 861.6 879.9 Expenses Salaries and Benefits 381.8 431.6 471.5 524.2 550.9 Materials and Supplies 70.9 74.5 74.3 75.0 79.6 Scholarships, Fellowships and Bursaries 48.1 49.0 54.4 59.6 68.5 Amortization of Capital Assets 33.8 38.0 41.0 44.9 48.2 Interest Payments 14.3 14.3 13.7 13.4 12.9 Other 97.5 95.5 103.2 92.9 83.5 Total Expenses 646.2 702.9 758.1 810.0 843.8 Employee Future Benefits (7.6) 17.6 18.6 (10.1) (2.6) Reimbursement of interest Rate Swaps (5.4) Net Income (Loss) 52.1 16.9 63.2 41.5 28.2 Adjustments Revenue [1] 657.9 677.1 741.8 803.0 821.9 Expenses [2] 598.2 653.9 703.7 750.4 775.2 Adjusted Net Income (Loss) 59.7 23.2 38.1 52.6 46.6 Funds From Operations 78.7 22.3 69.8 78.6 58.9 Free Cash Flow 51.6 2.8 74.9 14.6 37.2 [1] Revenue is net of scholarship expenses and adjusted to smooth investment returns. [2] Net of scholarship expenses. 8 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
Financial Trends (Year Ending 30/04) 2008 2009 2010 2011 2012 Provincial Funding as a % of Revenue [1] 43.1 42.7 44.0 45.3 45.6 Net Tuition as a % of Revenue [1] [2] 22.1 23.0 23.2 23.6 25.0 Interest Expense as a % of Revenue [1] 2.2 2.1 1.8 1.7 1.6 Debt Service as a % of Revenue [1] 2.8 2.4 2.1 1.9 5.3 Total Gift Revenue (C$ Millions) [3] 31.1 20.8 24.8 19.5 17.7 Funds From Operations as % of Revenue [1] 12.0 3.3 9.4 9.8 7.2 Annual Operating Margin (%) [1] 9.1 3.4 5.1 6.5 5.7 Average Operating Margin (%) [1] 11.4 8.9 5.8 5.1 5.8 [1] Revenue is net of scholarship expenses and adjusted to smooth investment returns. [2] Tuition fees are net of scholarship expenses. [3] Includes both donations recorded as revenue and as direct additions to endowments. Consolidated Balance Sheet (As At 30/04, C$ Millions) Assets Cash and Short-term Investments 359.5 317.4 368.7 354.7 354.1 Accounts Receivable 82.6 85.2 77.6 86.5 82.2 Investments 230.6 258.7 313.2 352.3 368.2 Capital Assets 624.1 649.7 690.5 746.7 805.8 Other 121.3 138.9 158.1 147.9 146.8 1,418.1 1,449.9 1,608.1 1,688.2 1,757.3 Liabilities Accounts Payable and Accrued Liability 50.6 65.3 68.7 75.1 89.7 Deferred Contributions 190.5 198.9 249.1 202.5 222.0 Long-term Debt and Debentures 214.3 217.6 211.1 209.7 181.4 Deferred Capital Contributions 207.5 216.1 226.7 294.9 323.7 Other 1.6 1.7 1.9 2.0 1.1 664.5 699.6 757.3 784.2 817.8 Net Assets Unrestricted 2.7 2.2 2.3 1.8 2.3 Internally Restricted 282.7 264.6 276.6 338.0 309.9 Equity in Capital Assets 214.7 224.3 258.7 247.8 307.4 Endowments Internally Restricted 15.1 15.2 20.5 22.3 24.6 Externally Restricted 126.0 113.9 144.1 155.6 159.2 Restricted for Employee Future Benefits 112.4 130.0 148.6 138.6 136.0 753.6 750.3 850.8 904.1 939.5 9 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
Balance Sheet Trends (As At 30/04) 2008 2009 2010 2011 2012 Total Cash and Investments (C$Millions) 590.1 576.1 681.9 707.1 722.4 Total Cash and Investments per FTE (C$) 15,860 15,008 16,937 16,748 16,615 Net Cash and Investments (C$Millions) [1] 464.0 462.2 537.8 551.5 563.1 Net Cash and Investments-to-Net-Direct-Debt (x) 2.4 2.4 2.9 3.1 3.7 Net Cash and Investments per FTE (C$) 12,472 12,040 13,358 13,063 12,952 Net Cash and Investments-to-Operations (x) 0.8 0.7 0.8 0.7 0.7 [1] Total cash and investments net of externally restricted endowments and unspent debenture proceeds. 10 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
Moody s Related Research Credit Opinions:» Canada, Government of» Ontario, Province of Special Comment:» Canadian Provinces Consolidating Finances in 2012, March 2012 (140455) Statistical Handbook:» Non-U.S. Regional and Local Governments, December 2012 (147414) Rating Methodologies:» Government-Related Issuers: Methodology Update, July 2010 (126031)» Methodology for Rating Public Universities, August 2007 (103498) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 11 MARCH 13, 2013 CREDIT ANALYSIS: UNIVERSITY OF OTTAWA, CANADA
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