YUFA
News
Bond Rating Agency Lowers
U of T’s Credit Rating
Robert MacDermid, YUFA Communications Officer
7 Oct 03 – As reported earlier this year, Canadian universities including York, Toronto, British Columbia and others have been borrowing large sums of money in the bond market. York sold $200 million dollars worth of bonds earlier this year, the University of British Columbia recently raised $125 million dollars, while U of T is planning to sell $300 million dollars worth of bonds.
The implications of universities borrowing funds in capital markets is now becoming clearer as bond rating agency Standard & Poor dropped the University of Toronto’s credit rating from AA+ to AA stable, a move that will probably result in the U of T having to pay higher interest rates on future borrowings. The drop in rating followed another bond rating agency's (Moody's Investor Service), late August decision to raise the credit worthiness of U of T’s bonds.
The money from the private placement of York’s bonds, probably held by a large financial institution or pension fund, is being used to finance the construction of the Schulich School of Business, the Technology-Enhanced Learning (TEL) Building, the Executive Learning Centre, Parking Structures II and III, and the new Atkinson Residence.
Borrowing money in the bond market as a replacement for cutbacks to provincial funding and as an alternative to mortgages has significant interest costs and opens universities to credit rating assessments. The capital York borrowed through the bonds will cost something on the order of $13 million dollars a year in interest costs.
In order to sell bonds, universities pay bond rating agencies for risk assessments. These same agencies later pass judgement on the credit worthiness of those public institutions. A revision downward of the credit rating means that a university will have to pay a higher rate of interest for future borrowings.
This incremental reliance of universities on capital markets potentially submits administrative decisions to private market constraints and the pressures of bond rating agencies. It also opens up university finances to review by these private agencies who now receive financial briefings that paradoxically are, in part, kept from the public because Ontario universities are excluded from the province’s Freedom of Information Act.
The Standard and Poor’s report noted that, "the downgrade [in credit rating] reflects a substantial weakening of the university's financial position for the year ended April 2003, owing to sharply increased unfunded employee pension and medical obligations and a cost base that is rising at a faster rate than the associated revenue, contributing to a structural deficit". The report went on to say, “the ratings also reflect the university's growing operating deficit, significant unfunded pension fund deficit, and substantial ongoing unfunded employee medical/dental obligations, as well as employment cost pressure implied by tenured faculty appointments.
The Standard and Poor’s report also noted that the AA stable rating “reflects Standard & Poor's expectation that the University of Toronto will maintain its strong academic and research position in the Canadian university sector. It should continue to attract high-quality students from a diversity of locations, which should ensure a solid, diversified income stream. Greater-than-inflationary staff cost pressures and the challenging capital program, together with financial asset weakness and significant unfunded positions of pension and medical/dental benefits, are likely to continue to inhibit the generation of operating surpluses and limit financial flexibility in the near to medium term. Continued or increased pressure on operating margins, together with further deterioration of financial assets, could result in a downward outlook or ratings revision.”
A report in the Toronto Star notes that “U of T represents Canada's second-safest credit risk among universities. Queen's University is the top-ranked school with a rating of double-A-plus, while McMaster University has a double-A rating. McGill, the University of Guelph and York each are rated double-A-minus (Toronto Star, Sept. 27, 2003).”