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Rating Action:

MOODY'S ASSIGNS Aa2 RATING TO McGILL UNIVERSITY'S $150 MILLION OF SENIOR UNSECURED DEBENTURES

05 Sep 2002
MOODY'S ASSIGNS Aa2 RATING TO McGILL UNIVERSITY'S $150 MILLION OF SENIOR UNSECURED DEBENTURES

THIS IS McGILL'S FIRST SELF-SUPPORTED RATED DEBT ISSUANCE

New York, September 05, 2002 -- Moody's Investors Service has assigned an Aa2 rating with a stable outlook to McGill University's (The Royal Institution for the Advancement of Learning) CN$150 million Senior Unsecured Debentures. Bond proceeds will finance additional residence, parking, and food service facilities, as well as two leasable floors of a Genomic and Proteomics building.

The Aa2 long-term debt rating reflects:

--McGill's significant independent financial strength, highlighted by financial resource levels approaching CN$1billion and below-average reliance on provincial funding for operations;

--Very strong student demand, driven by the University's internationally recognized academic reputation as well as growth in McGill's core market of traditional age students;

--Premier research programs that bolster ability to attract faculty and students

--Diversified revenue streams contributing to balanced financial operations; and

--Currently favorable provincial funding environment, which is expected to continue for the foreseeable future.

McGILL HAS SIGNIFICANT INDEPENDENT FINANCIAL STRENGTH AND MODERATE LEVERAGE

McGill's healthy financial reserves, exceptional student market position, and diverse revenue streams provide strong credit fundamentals enabling the University to garner a rating that is higher than the Province of Quebec's (A1, positive outlook). Incorporating pledge and research receivables, the University's financial resources base is approaching $1 billion. Of this, over $750 million is held in cash and investments at market. Totally unrestricted reserves (excludes receivables) exceeded $340 million at market value at the end of FY 2001, covering the University's proposed debt issuance by nearly 2.3 times or covering seven full months of operations. This is a very healthy level of liquidity that provides significant comfort regarding the University's ability to weather potential volatility in its operating environment.

McGill's endowment has been bolstered by notable fundraising success, with the University raising nearly $600 million in donations since 1995, over $65 million now on an apparently sustainable annual basis absent specific campaign fundraising. The University is in the planning stage of a new campaign, which could target half a billion dollars, and should further bolster philanthropic support and resource levels. Distribution from the endowment is prudent at 5% of a three-year average market value.

The University's degree of self-supported leverage will be moderate after this issue and is expected to remains so as management has not identified any near term additional borrowing plans. In addition to the current issue, which is primarily for revenue-generating projects, the University has an additional $282 million of debt (including $60 million of short-term financing) that has been issued in its name and for which it is legally responsible. However, the Province has historically provided full debt service payment for these "grant bonds" under a long-established program. Until there is some indication that the Province would step back from its debt service commitment, which we believe is highly unlikely, we consider this debt to be externally supported with minimal direct credit impact to the University.

STRONG STUDENT DEMAND EXPECTED TO SUSTAIN STEADY ENROLMENT

As a result of the University's premier academic reputation, broad array of academic programs, and demographic growth among the University's market of traditional age students, we expect student demand and enrolment to remain robust for the foreseeable future. The University now enrolls over 24,000 full-time equivalent students, 80% of whom study at the undergraduate level, at its two campuses in Montreal.

Depth of demand for the University is demonstrated by the fact that McGill only accepts 40% of its applicants, with over 50% of accepted applicants enrolling. Furthermore, the University's student draw is geographically diverse, with approximately 53% of the University's undergraduate enrolment derived from in-province students, 29% from the rest of Canada, and 18% from the rest of the world. The addition of student housing financed by the current bond issue should increase the attractiveness of the University for students.

While demand is strong, the University has limited ability to derive direct financial benefit, as tuition remains regulated by the province. Tuition has been frozen since the mid- 1990s, reflecting the government's commitment to access and affordability. Furthermore, the Province retains any additional tuition generated from out-of-province enrolment. We believe that with its strong demand, the University would have significant tuition flexibility if the provincial freeze were ever to be lifted.

RESEARCH PROGRAMS ENHANCE RECRUITMENT ABILITY AND CONTRIBUTE TO REVENUE DIVERSITY

McGill is also one of the nation's top research universities, with nearly $145 million of research expenditures in 2001. This represents a 25% growth in just the last three years. Research revenues have increased by an even more impressive 75% over this time frame, reflecting a ramping up in grants and contracts (recognized when received) and indicating continued growth in the University's research endeavors. With federal government re-investment in research funding and infrastructure through such programs as the Canadian Fund for Innovation and the Canada Research Chairs, we expect the University's research enterprise to continue contributing to overall financial strength.

Strong research programs contribute to credit quality as they typically enhance an institution's ability to attract top quality faculty, leading to increased academic reputation and student draw. They also provide some revenue diversity, a factor that will become more of a credit positive if the federal government continues to fund at least a portion of the indirect cost of research, which it began to do just this past year for the first time. Over the long-run, there is likely also some philanthropic benefit as donors tend to give more funding to already high-profile and successful institutions.

DIVERSIFIED REVENUE STREAMS CONTRIBUTE TO FINANCIAL STABILITY

The University's broad scope of operations and diversified revenue streams contribute to financial stability as cutbacks in any individual area are less likely to have as strong an impact on operations. For example, the University now receives only a third of its budget from the province, a reliance that has declined notably over time. Other funding is derived from research grants and contracts (32%); student charges, including tuition and ancillary enterprises (15%), investment income (6%) and various other sources.

With the exception of investment income for operations, which is likely to remain stagnant over the near term due to general investment volatility limiting endowment growth, we anticipate continued increases in all of the University's other revenue streams. This should lead to an ability to maintain better than balanced operations. Furthermore, with additional revenue to be derived from the financed facilities, we anticipate that the University should be able to comfortably cover debt service requirements.

PROVINCIAL FUNDING ON THE UPSWING

Provincial funding now appears favorable for the foreseeable future. The Province has committed to reinvest in higher education over the three-year period of FY 2001-2003. Over this timeframe, an additional $300 million is being added to the base operating budget for higher education, with a portion of increased funding for individual institutions tied to performance contracts with the Province, outlining specific objectives, with regular monitoring of progress by the Province. The Province also provided approximately $38 million of special funding in fiscal years 1999 and 2000 to reduce the University's accumulated deficit. Moody's recently revised the outlook on the Province's A1 credit rating to positive, from stable, reflecting the improvements in the province's financial performance and a gradual downward trend in its debt burden.

However, the Province does have a history of volatility in funding for its higher education institutions, which acts as a credit negative. During the 1990s, the University's operating budget was cut by 22% over just three years, at the same time as the Province's tuition freeze remained in effect, limiting the University's flexibility to respond from a revenue perspective and resulting in cutbacks in programs and investments in facilities. This contrasts with the experience of higher education institutions in British Columbia and Ontario during similar periods of provincial fiscal stress. In British Columbia during the 1990s, while funding was not increased, neither was it reduced significantly. In Ontario, provincial funding was cut substantially in a short period of time, but universities were given the ability to raise tuition to offset, resulting in less revenue instability.

OUTLOOK

The rating outlook for McGill is stable over the medium-term. This reflects our expectation that student demand and research will remain strong; operating performance will remain positive with continued increased funding from the province; and debt levels will remain moderate with some offsetting resource growth as the University enters into a new campaign.

CONTACTS:

McGill University: Albert Caponi, Executive Director-Financial Services, 514-398-6667

Financial Advisor: Michel Duchesne, RBC Capital Markets, 514-878-7711

KEY DATA AND RATIOS AS OF FY 2001:

Total FTE Enrolment: 24,117 (fall 2001)

Total Pro-forma Self-Supported Debt: $150 million

Total Financial Resources: $994 million

Expendable Resources to Debt: 3.3 times

Expendable Resources to Operations: 10 months

Total Resources per Student: $41,235

Reliance on the Province: 34%

*all dollar amounts reflect Canadian dollars

New York
Susan Fitzgerald
Senior Vice President
Public Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Gabriel Topor
Associate Analyst
Public Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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