Despite a recent downgrade to their credit rating, Queen’s still has one of the best ratings of any Canadian university.
In July 2010 Dominion Bond Rating Service Limited (DBRS) downgraded Queen’s Senior Unsecured Debt Rating from AA high to AA . Credit ratings span from AAA as the best rating and D as the worst.
“The rating is an indication or assessment of credit risk related to Queen’s University,” Managing Director of DBRS Ltd. Eric Beauchemin said. “Investors don’t have time to do the research, so they need to have a credit rating. Ratings are assigned at the request of the client, and we assigned a rating for Queen’s for the first time in November 2002.”
While the downgrade marks an erosion in credit profile, according to Beauchemin, an AA is still a great rating. He said Queen’s rating is now two notches below the federal government’s AA score. The University of Toronto and University of Ottawa also have high credit ratings both coming in at AA .The Queen’s downgrade is primarily due to the debt burden caused by capital projects.
“Queen’s needed debt to fund capital projects, such as Phase I of the Queen’s Centre and the School of Kinesiology,” Beauchemin said.
Phase I of the Queen’s Centre and the School of Kinesiology were built by January 2010 and the total cost of these two projects was $169 million. The original projected estimate in 2004 for Phase One was set at $124 million. Beauchemin said as a result, Queen’s now has a larger than expected debt increase.
While the debt burden had increased to $244 million by June 2010, which is about $13, 000 per full time student, the debt and consequent downgrade in credit rating is not something to worry about, Beauchemin said.
“Students won’t pick up on debt burden and it’s not something to worry about. The debt is still really affordable,” he said, adding that how the university chooses to deal with its deficit could potentially affect students.
“The University will have to make some hard decisions on how to deal with the deficit. They might have to have bigger classrooms or constrain salary increases,” he said.
DBRS will continue to monitor Queen’s credit rating and Beauchemin said he’d like to see the University employ a proactive approach to control its debt.
“We have an annual review process where we keep track of developments that would impact credit rating. We discuss the budget and developments with clients and all major components that would go into debt. It is an ongoing process to ensure that the rating continues to reflect the credit quality,” Beauchemin said, adding that a new report will be published mid-year 2011.
This credit rating shouldn’t impact how Queen’s is viewed among investors, he said.
“Universities don’t run their business to maintain a rating. We expect them to remain conservative in their spending, and Queen’s has been,” he said.
Mounting debt didn’t cripple the credit rating in part because other factors are also taken into when making a credit rating.
“Queen’s has a strong reputation and has a high levels of academic success, which is important to consider,” Beauchemin said.
Caroline Davis, vice-principal (finance and istration), said that while this rating is a downgrade, it’s not worrisome for Queen’s.
“Queen’s, like most other Ontario universities, is facing significant financial strain because of a variety of factors, including market volatility and government constraint … Credit rating reports reflect what we already knew, and what has been and continues to be, a significant concern for the University,” she told the Journal via email.
“Dominion Bond Rating Service marginally downgraded Queen’s credit rating because of the steadily expanding gap between the University’s pension fund and its projected liabilities. As these reports and the latest audited consolidated financial statements show, we are making good progress. We will continue to work at this. It’s an obvious priority.”
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