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 UHN’s real property assets, including three 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.

UHN recorded a better-than-expected surplus of $28.1 million, or 1.5% of total revenues in 2012-13, down slightly year over year. Preliminary indications suggest that the Hospital finished 2013-14 with a consolidated surplus similar to that of 2012-13. After increasing to $327.5 million in 2012-13, as UHN drew on one of its credit facilities to support the construction of the Krembil Discovery Tower, total funded debt is estimated to have fallen to $308.5 million as of March 31, 2014. Sound revenue generation and lower interest expense helped push the cash receipt to debt service ratio to 42:1 as of December 31, 2013, far exceeding the minimum requirement under Trust Indenture and adding flexibility within the current rating.

The 2014-15 operating budget is yet to be approved, but preliminary planning assumptions include a third consecutive year of no increase in base provincial funding, higher spending to address patient volumes and investments in nursing capacity and technology. Cost containment will be aimed at service delivery and process improvements, along with reductions in some in-patient and ambulatory spending. The board approved a new five-year capital plan in August 2013, calling for $481.6 million in spending between 2013-14 and 2017-18. UHN currently has no new debt requirements stemming from the new capital plan, and as such debt is expected to decline further in the years ahead.

An upcoming provincial election raises considerable uncertainty on the policy front. In recent years, the Province has sought to bring health care spending growth down through a myriad of initiatives, including promoting specialization in hospitals and introducing a new hospital funding model. The new funding approach focuses on tying a greater share of grants to patient outcomes, but has also resulted in a lack of predictability with respect to funding forecasts, which has complicated UHN’s budget planning and clouded its operating outlook somewhat. Nevertheless, DBRS believes UHN maintains strong fundamentals, including its role as one of the nation’s preeminent teaching hospitals, its breadth of services in acute and complex procedures and high patient volumes, which make it an integral component of Ontario’s health care system. Additionally, with its track record of sound operating results over the past decade, manageable debt burden and established fundraising operations, UHN maintains flexibility within its credit profile to withstand unforeseen challenges that may lie ahead.

Notes:
All figures are in Canadian dollars 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.