A temporary cap on the number of international students attending Canadian institutions will likely erode the financial headroom of universities. International student tuition is largely unregulated in Canada and public universities have become increasingly reliant on it to boost revenue and fuel expansion amid largely stagnant provincial operating funding. A recently imposed two-year cap on international student permits will stem university revenue growth and likely impair financial performance in the medium term. However, S&P Global Ratings expects that generally deep sources of liquidity and prudent responses from university management teams will largely mitigate the impact on credit ratings.
What's Happening
The Canadian federal government estimates that its temporary cap will result in a 28% decrease in international postsecondary student visa permits in the 2024-2025 and 2025-2026 academic years. The cap does not apply to study permit renewals or to master's or doctoral students.
Why It Matters
The number of international students enrolled in Canadian universities has increased about 2.5x over the past decade. They now account for more than 17% of total university enrollment in Canada and international undergraduates pay close to 5x more tuition on average than Canadian students. As well, their fees and enrollment numbers have been climbing at a faster pace than those of domestic students, which when combined with a general flattening of provincial operating funding, has increased institutional exposure to revenues from international students.
Rated Canadian universities have varying exposure to international students. The median exposure among the nine Canadian public universities that we rate is in line with the national level, at 8% to 30% of enrollment. The universities with the highest exposure to international students (University of Toronto [UofT], McGill University, and University of British Columbia [UBC]) are, not coincidentally, also the top performing Canadian institutions in international rankings and are located in the largest metropolitan areas in the country, which tend to draw from deep pools of domestic students and likely will remain attractive to international students.
Reduced international enrollment will compress operating margins in the medium term. However, the impact won't be equally felt across the sector. Rated Canadian universities display strong credit quality, with ratings between 'A-' and 'AA+' and what we view as strong market positions. A key credit strength and mitigant to short-term revenue fluctuations is the generally robust liquidity positions of these universities. The fiscal 2023 median level of total cash and investments to operating expenditures and to debt were 1.4x and 5.2x, respectively.
What Comes Next
Provinces determine how they distribute their allocation of study permits. Ontario, home to six of nine rated Canadian universities, is set to see a material drop in study permits; however, the provincial government plans to distribute 96% of its allocation to publicly funded colleges and universities. It also estimates that almost all public universities will receive a similar level of study permits as in 2023, limiting the downside for these institutions. British Columbia (B.C.) is estimating a 14% decline to its allocation and is distributing 53% to public institutions. UBC could therefore see a modest drop in international enrollment. Meanwhile, Quebec--which traditionally welcomes fewer international students than Ontario and B.C.--expects to see an increase in its overall approved study permits.
Management teams will need to remain nimble. The cap was introduced during the application period and at this point, the impact on fall enrollment is unclear. We expect university management to employ a variety of strategies to limit the longer-term impact on credit metrics, including increasing acceptance rates, scaling back operating and capital expenditures, and reviewing profitability of programs and courses.
Related Research
- Australian Universities: Would International Student Caps Spur A Course Correction?, June 11, 2024
- McMaster University, May 16, 2024
- Queen's University Ratings Affirmed At 'AA+'; Outlook Is Stable, April 16, 2024
- University of British Columbia Downgraded To 'AA-' From 'AA' Following Same Action On Province; Outlook Negative, April 9, 2024
- University of Western Ontario Outlook Revised To Positive On Stable Enrollment And Strong Financial Results, Feb. 21, 2024
- York University Ratings Affirmed At 'A+'; Outlook Remains Stable, Jan. 22, 2024
- University of Guelph Ratings Affirmed At 'AA'; Outlook Remains Stable, Jan. 18, 2024
- McGill University Ratings Affirmed At 'AA-'; Outlook Is Stable, Dec. 18, 2023
- Universite du Quebec a Montreal Rating Affirmed At 'A-'; Outlook Is Stable, Dec. 13, 2023
- University of Toronto Ratings Affirmed At 'AA+'; Outlook Is Stable, Dec. 13, 2023
- Outlook For Global Not-For-Profit Higher Education: Credit Quality Divergence Continues, Dec. 7, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Adam J Gillespie, Toronto + 1 (416) 507 2565; adam.gillespie@spglobal.com |
| Secondary Contacts: | Elisa Lopez cortes, Toronto +1 416 507 2574; elisa.lopez.cortes@spglobal.com |
| Sabrina J Rivers, New York + 1 (212) 438 1437; sabrina.rivers@spglobal.com | |
| Dina Shillis, CFA, Toronto + 1 (416) 507 3214; dina.shillis@spglobal.com |
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