DBRS Confirms University Health Network at AA (low), Stable Trend

DBRS has today confirmed the rating of the Secured Bonds issued by the University Health Network (the Hospital or UHN) at AA (low), with a Stable trend. UHN’s credit profile is closely tied to that of the Province of Ontario (the Province; rated AA (low)), as a result of the importance of UHN to Ontario’s health-care system and the Province’s incentive to fund health-care institutions. The rating also reflects the bondholders’ substantial security package, which includes a security interest in cash receipts (capturing most provincial funding) and a security interest in all of UHN’s real property assets, including four hospital sites in downtown Toronto. DBRS notes that this security package is considerably stronger than that of most Ontario hospitals, school boards and universities with outstanding public bonds.

The Hospital recorded a $29.6 million surplus in 2011–12, up by 27% over the prior year. UHN continues to fare well in a challenging funding environment, as overall revenues rose by 5.2%, outstripping expenditure growth of 5.0% in 2011–12. Preliminary indications suggest that UHN is on track to again report better-than-expected surplus for fiscal 2013, a year that marked the introduction of the Province’s new hospital funding regime. The Hospital continues to grapple with persistent inflationary cost pressures, as well as high emergency room volumes, and is entering the second year of zero base funding increases. DBRS expects that the combined impacts of the Province’s intention to hold the line on hospital spending in favour of lower-cost alternatives (such as community care and home care), transition to a new funding model and the broader goal of capping annual health-care expenditure growth at 2.0%, will make continued operating surpluses harder to achieve in the years ahead. However, as an integral component of the Province’s health-care delivery, with expertise in acute care, research, teaching and service delivery across the full spectrum of care, UHN is not expected by DBRS to be unduly affected by the new funding formula.

Total funded debt at year-end 2012 stood at $317 million, and sound revenue generation helped to keep UHN’s cash receipts-to-debt service ratio (CRDSR) at a robust 40:1, well above the required level, thus adding flexibility within the current rating. Early indications suggest that at March 31, 2013, total funded debt stood at $333 million, while the CRDSR remained steady at 41:1. The latest five-year capital plan (2013–2017), as of October 2012, points to $433 million in spending on a series of capital renewal and redevelopment projects, including $67 million to complete the Krembil Discovery Centre, which is expected to open in summer 2013. UHN does not currently anticipate requiring new borrowing over the near term to address these planned projects. However, DBRS notes that the Hospital is currently developing a multi-year capital plan to address the next phase of capital expansion, which could potentially require new borrowing over the medium term. DBRS believes that the Hospital maintains some flexibility to add new debt in light of its track record of solid operating performance and sound level of financial resources, which stood at $422 million at December 31, 2012, and net assets of over $700 million from its affiliated foundations. Additionally, UHN’s unique position within Ontario’s health-care system allows for stability in government receipts, amidst cuts at other Ontario hospitals, and established fundraising operations. In addition to other factors, in assessing the affordability of additional debt, DBRS will consider UHN’s ability to manoeuver within the restrictive funding environment, prevent notable erosion in its debt service coverage ratio and maintain a CRDSR meaningfully above the minimum required under the Trust Indenture. DBRS expects to be able to provide greater clarity on the trajectory of UHN’s debt and credit profiles over the medium term by the next annual review.

Notes:
All figures are in Canadian unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Canadian Public Hospitals, which can be found on our website under Methodologies.