DBRS Morningstar Confirms Rating on Hamilton Health Sciences Corporation at AA (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Senior Unsecured Debentures rating of Hamilton Health Sciences Corporation (HHSC or the Hospital) at AA (low) with a Stable trend. The rating is based on HHSC’s importance to the Province of Ontario’s (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) healthcare system and strong operational and financial links to Ontario. The rating also reflects 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 exercised by provincial governments.

HHSC has a strong brand and reputation, occupying a strategic position within the provincial healthcare system as the largest care provider in the Hamilton-Niagara area and one of the largest academic health sciences centres in Ontario. The Hospital is the regional referral centre for specialized services in numerous clinical areas and is a leader in Canadian medical research; as a result, a disruption in clinical services would be highly detrimental to a significant share of the provincial population.

HHSC has a track record of positive operating results, despite increasing volumes/acuity and constrained funding growth. In 2018–19, HHSC recorded a consolidated surplus of $6.2 million, or 0.4% of revenues, after designated transfers to the affiliated Hamilton Health Sciences Research Institute. The Hospital’s operating outlook is somewhat uncertain as the Province is currently reorganizing its healthcare system and is focused on deficit-reduction initiatives that will likely affect funding levels and reporting requirements. Nevertheless, these changes are likely to be modest and gradual, and DBRS Morningstar expects that the Hospital will continue to target modest surpluses.

At March 31, 2019, HHSC had $313.6 million in total debt, including capital-lease obligations, long-term debt, and Bay Area Health Trust’s guaranteed debt. The Hospital’s debt-to-revenue ratio is now 20.1%, up from 10.0% in the previous year, while interest costs are very modest at just 0.2% of total revenues. DBRS Morningstar expects HHSC’s total debt burden to peak at approximately $342 million, or 29% of revenue from Hospital operations in 2021–22, pending HHSC’s initiation of a capital lease for managed equipment services.

RATING DRIVERS
A change in the Province’s credit rating would trigger an equal change in HHSC’s rating, given the link between their credit profiles. While not anticipated, DBRS Morningstar may consider a lower rating for the Hospital than for the Province if HHSC experiences material deficiency or weakness in additional rating factors, such as a sustained deterioration in its annual operating performance, with no management response or government support.

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 access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada