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

DBRS Limited (DBRS Morningstar) confirmed the Senior Unsecured Debentures rating of Scarborough Health Network (SHN or the Hospital) at AA (low) with a Stable trend. The rating reflects DBRS Morningstar’s view on SHN'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 is also supported by the absence of material weaknesses in the Hospital’s governance, operating performance, leverage, and financial strength.

DBRS Morningstar assigns the same rating to important hospitals as to their provincial governments, provided that there are no material deficiencies or concerns. This practice reflects DBRS Morningstar’s view that there is the greatest likelihood of support and thus the strongest linkage to the provincial credit profile for hospitals that are fundamentally important to the provincial healthcare system. The Coronavirus Disease (COVID-19) pandemic has reinforced this view as hospitals remain critical to the Province's coronavirus response and continue to receive additional financial support and resources.

The impact of the coronavirus pandemic has been significant in 2020–21 as surging coronavirus infections created staffing and capacity constraints on hospitals. Although rising costs of operations, consistently high levels of unfunded beds, and loss of some ancillary revenues (such as parking operations) will weigh on operating results, significant provincial funding support to the healthcare sector will offset the deterioration to a large extent.

SHN issued $120.0 million senior unsecured debentures in F2020, resulting in a debt-to-revenue ratio of 18.8% in 2019–20. This debt burden is similar to or lower than those at other Ontario hospitals with debentures outstanding. DBRS Morningstar anticipates SHN's interest costs to increase on a full-year basis in future years but to remain under 1% of revenue, which is considered modest. The Hospital does not anticipate additional debt funding in the near term.

RATING DRIVERS
A positive or negative rating action will most likely be tied to changes in the Province’s credit rating. For more information about possible rating drivers, please refer to the Province of Ontario rating report dated January 8, 2021. While not anticipated, DBRS Morningstar may consider a lower rating for the Hospital than for the Province if SHN experiences a 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Canadian Public Hospitals (April 20, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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.dbrsmorningstar.com or contact us at [email protected].

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