Toronto rating falls with markets

October 10, 2003

The weakened stock market that has hit university pension and endowment funds in Canada has been cited as the principal reason for the reduction in the credit rating of the University of Toronto.

Worries about the pension fund drove Standard & Poor's to cut Toronto's rating of AA+ -shared with only one other Canadian university, Queen's, and higher than any British universities that have sought a rating -to AA.

Earlier this summer, the Universite de Montreal fell victim to an imploded high-profile hedge fund.

S&P's analysis said Toronto's problem lay in its financial asset weakness, characterised by a rising operating deficit, a recent C$200 million (Pounds 89 million) debt issuance and a pension fund that fell from an C$86 million surplus to a deficit of C$398 million.

"The reversal from a net creditor to a net debtor is one of the key factors contributing to the ratings action," the analysts wrote. The cause of the pension erosion was the weakened financial market of the past few years, they said.

Otherwise, S&P said, the university is in good shape, with diverse revenue sources, a strong and growing research capability, fundraising and significant endowment income. "It's still a tremendously high rating," said S&P's Paul Calder, who contributed to the ratings analysis.

Montreal, which has never sought a credit rating, is assuring its pension fund members that its recent bad luck will not take it off its financial course. In July, it learnt that the hedge fund in which it had sunk nearly C$100 million of pension money was being investigated by the US Securities and Exchange Commission.

The SEC accused Lancer Offshore and analyst Michael Lauer of manipulating stock and deceiving investors. The SEC laid fraud charges and froze the fund.

Montreal has joined the many lawsuits launched against the investment company and faces a possible C$100 million loss. "Despite uncertainty over the real value of the Lancer investments, the (university) pension fund's financial situation will remain stable and the fund will continue to assume all its obligations," Montreal told fund members.

The bad news on the equity markets will not change the way the country's universities conduct their investment planning, said a member of the Canadian Association of University Business Officers. Laura Kennedy, associate vice-president for financial services at the University of Saskatchewan, said the stock market fall had not put Canadian universities off, despite weak returns.

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