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. The rating of the Secured Bonds is closely tied to the credit strength of the Province of Ontario (the Province; rated AA (low), Stable trend by DBRS), given the Hospital’s integral position in the provincial health-care network and high level of public funding support for UHN. The rating is also supported by UHN’s record of prudent financial management, sizable foundation assets and sound liquidity position. 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.

UHN was in a near-balanced consolidated position for the year ended March 31, 2016, recording a surplus of $2.3 million, or 0.1% of revenues, down from $22.9 million surplus achieved the prior year. The narrower operating margin stems from persistent inflationary pressures that were not fully offset by grant or own-source revenue gains. The Hospital saw revenue growth of 4.2%, driven primarily by notable growth in ancillary operations, and from a 2.5% increase in grant funding received from the Ministry of Health and Long-Term Care (the Ministry or MOHLTC). Expenses outpaced revenues, rising by 5.3% year over year, driven by higher labour costs, drug, medical and surgical supply costs, and operational and maintenance outlays. Interest charges on long-term liabilities declined by 6.3% as total funded debt declined to $268.4 million from $287.1 million the prior year.

DBRS believes that the operating environment will remain challenging, given that the hospital funding regime is now influenced by more variables and is somewhat less predictable, and that UHN faces growing demand and costs pressures. However, the Hospital’s debt burden is expected to continue to gradually decline with the amortization of the Secured Bonds and repayment of credit facilities, adding flexibility to an already strong credit profile. UHN’s capital plan is to be primarily financed through internal sources, such as working capital and reserves, and by Ministry grants and external foundation contributions, limiting new external indebtedness. New debt requirements could surface over the medium term as growing patient volumes eventually create demand for new capacity.

RATING DRIVERS
Downward pressure on the rating, although not anticipated, could come from a change to the rating of the Province, or from a material deterioration in operating performance or significant increase in debt that stresses UHN’s ability to meet its debt covenants or deliver patient services. Positive rating action is not contemplated, as the rating of the Hospital is already in line with that of its provincial funder.

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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.