TEXT-S&P affirms York University 'AA-' ratings on strong demand

Thu Dec 13, 2012 11:39am EST

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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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