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 debt issued by an important hospital as to its provincial government, 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 critically important to the Province's coronavirus response and continue to receive additional financial support and resources.

Assuming largely normal working conditions, the Hospital expects balanced results in F2022. There are some headwinds to SHN's operating outlook, such as renewed pandemic-related constraints in early 2022, rising costs of operations, consistently high levels of unfunded beds, and loss of some ancillary revenue (e.g., parking operations). However, provincial funding to the healthcare sector and cost efficiency/savings initiatives will offset the deterioration to a large extent. Excluding a one-time working capital grant ($26.8 million), SHN recorded a $4.6 million surplus for the year ended March 31, 2021; the Province maintained funding levels despite adverse variance in volumes and reimbursed costs directly related to the pandemic.

SHN’s debt levels are manageable, with a debt-to-revenue ratio of 16.8% (F2021), similar to or lower than that at other DBRS Morningstar-rated Ontario hospitals with debentures outstanding. DBRS Morningstar anticipates SHN's interest costs to remain well under 1% of revenue, which is modest. The Hospital does not anticipate additional debt funding in the near to medium term.

RATING DRIVERS
A change in Ontario's ratings would lead to an equal change in the Hospital's rating. While not likely, 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Canadian Public Hospitals (March 23, 2021; https://www.dbrsmorningstar.com/research/375734), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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