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

DBRS Limited (DBRS) has today confirmed the rating of the Secured Bonds issued by University Health Network (the Hospital or UHN) at AA (low) with a Stable trend. UHN’s credit profile is closely tied to the profile of the Province of Ontario (the Province; rated AA (low)), given the importance of UHN to Ontario’s health-care system and the Province’s strong motivation 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 broader public sector entities with outstanding public bonds.

Amid a restrictive funding environment, UHN reported a $22.9 million consolidated surplus, or 1.1% of revenues, in 2014–2015, reflective of the Hospital’s disciplined financial management practices. Revenue growth was slightly slower than expense growth, owing largely to softness in provincial funding, which grew by only 1%, and lower ancillary revenues. Labour-related expenses and supplies and drug expenses were the primary expense pressures. Total funded debt declined to $287.1 million as at March 31, 2015, from $303.2 million a year earlier, owing to the amortization of the Secured Bonds and repayment of other loans. Increased revenues and lower interest expense helped push the cash receipt-to-debt service ratio to 41:1 as of March 31, 2015, ahead of the minimum requirement under the Trust Indenture, adding flexibility within the current rating. The 2015–2016 operating budget has not yet been approved, but as mandated by the Province, the Hospital expects to produce a balanced operating budget, despite a third consecutive year of flat global provincial funding, which will necessitate $16 million in cost savings. The three-year transition from a global funding to a patient-based hospital funding formula is now complete. DBRS expects the operating environment to remain challenging, given that the new funding regime is now influenced by more variables and is relatively less predictable, and that UHN faces growing demand and costs pressures. Nevertheless, the rating continues to be supported by UHN’s proven track record of management prudence, sizable foundation assets and sound liquidity position.

UHN currently has no plans to borrow over the near term, as capital support from affiliated foundations, continued efforts to build up working capital reserves and increased capacity under existing credit facilities have helped to limit the need for external financing. However, DBRS notes that new debt requirements could surface over the medium term as growing patient volumes eventually create demand for new capacity.

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.