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

DBRS Limited (DBRS Morningstar) assigned a provisional rating of AA (low) with a Stable trend to Lakeridge Health’s (the Hospital) proposed Series A Senior Unsecured Debentures (the Debentures). The rating reflects Lakeridge Health’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 support arises from the importance of healthcare to provincial governments, high levels of government funding, and significant control and oversight by provincial governments.

Lakeridge Health is a large community hospital in the Greater Toronto Area with five acute-care community hospitals, a residential treatment facility, and 14 community care facilities that provide a range of services. The Hospital is the sole provider of acute-care services for much of Durham Region, which has a population of about 650,000 and is one of the fastest-growing areas in Ontario. Lakeridge Health is also a teaching hospital.

The Hospital has reported relatively strong operating results in the past, though operating results have narrowed over the last two years because of seasonal flu pressures and an increasing number of beds allocated to Alternative Level of Care (ALC) patients. The Hospital is actively working with the Province and other health system partners to transition some ALC patients to more appropriate settings and is seeking additional funding to offset related cost pressures. Lakeridge Health is not permitted to incur operating losses and expects to maintain balanced operating results through the medium term.

The Hospital plans to issue $100.0 million in Debentures to fund its share of a joint Clinical Information System and several other small capital projects. DBRS Morningstar projects that the Hospital’s total debt will be $135.7 million, representing about 21.0% of revenue, at March 31, 2020. Similarly, interest costs will rise to about $4.3 million on a full-year basis, equivalent to 0.6% of revenue. The Hospital plans to establish an internal debt retirement 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. A positive rating action would require an upgrade of the Province of Ontario. While a downgrade of the Province of Ontario would lead to an equal change in the Hospital’s rating, Lakeridge Health’s rating could also be lowered with significant changes in operations, management/governance, operating results, leverage, or financial strength.

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 in the rating process for this rating action. DBRS Morningstar had/did not have access 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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