DBRS Morningstar Assigns Provisional Rating of AA (low), Stable Trend, to Scarborough Health Network

DBRS Limited (DBRS Morningstar) assigned a provisional rating of AA (low) with a Stable trend to Scarborough Health Network’s (SHN or the Hospital) proposed Senior Unsecured Debentures. The rating reflects SHN’s strong operational and financial links to the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) and the absence of material weaknesses in the hospital’s governance, operating performance, leverage, and financial strength.

DBRS Morningstar assigns the same rating to debt issued by important hospitals as to their provincial governments, provided that there are no material deficiencies or concerns. DBRS Morningstar believes that the greatest likelihood of implicit support arises from the importance of healthcare to provincial governments, high levels of government funding, and significant control and oversight by provincial governments.

SHN is a large community hospital network in the Greater Toronto Area with three acute-care hospital sites and eight satellite sites. The Hospital is the sole provider of acute-care services in Scarborough and offers healthcare services to about one million Ontarians. SHN is also a teaching hospital affiliated with the University of Toronto (rated AA with a Stable trend by DBRS Morningstar) with a growing research profile.

SHN reported small operating surpluses in each of the last two years, partly because it aims to generate cash internally to fund its share of capital expenditures. The Hospital’s operating outlook is somewhat uncertain as the Province is currently reorganizing its healthcare system and employing deficit-reduction initiatives that will likely affect funding levels and reporting requirements. Nevertheless, these changes will likely be modest and gradual and, as such, DBRS Morningstar expects SHN to continue to target modest surpluses that will contribute to net asset growth.

SHN plans to issue $120.0 million in Senior Unsecured Debentures to fund its share of a joint Clinical Information System and several other small capital projects. Following the issuance, DBRS Morningstar projects that the Hospital’s total debt will be $129.3 million, representing 18.0% of revenue, at March 31, 2020. Similarly, interest costs will rise, but will remain modest at about $4.0 million, representing 0.6% of revenue. The Hospital also plans to establish an internal sinking fund to repay the debentures.

DBRS Morningstar will likely tie any positive or negative rating action to changes in Ontario’s Issuer Rating and Long-Term debt rating. For more information about possible rating drivers, please refer to DBRS Morningstar’s rating report on the Province dated May 31, 2019.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Public Hospitals, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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