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 DBRS Morningstar’s view of 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 any 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 those 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.

For 2022–23, management has indicated the Hospital will likely post balanced results on a consolidated basis, assuming that one-time funding materializes as anticipated. DBRS Morningstar expects the Province to continue mitigating incremental pandemic-related costs and, despite some uncertainty around the funding for other patient volume-related costs, provincial supports will likely persist to insulate hospitals from any additional financial pressures. For 2021–22, the Hospital recorded close to balanced results with a slight deficit of $0.8 million compared with an operating surplus of $5.9 million in the prior year.

HHSC's total debt increased to $353.3 million at March 31, 2022, compared with the previous year's $336.7 million driven by debt related to the revitalization of the cogeneration assets acquired from Bay Area Health Trust. This equated to a debt-to-revenue ratio of 20.3%, modestly lower compared with 20.5% in the previous year. Interest costs remain modest at 0.6% of total revenue. HHSC’s total debt burden, including capital-lease obligations and bank indebtedness, is likely to peak around $377.6 million, or roughly 22.7% of total revenue in 2022–23, largely in line with DBRS Morningstar’s earlier expectations.

A positive rating action would require an upgrade of the Province’s ratings. While a downgrade of Ontario’s ratings would lead to an equal change in the Hospital’s rating, significant changes in operations, management/governance, operating results, leverage, or financial strength could also negatively affect HHSC’s rating.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is Rating Canadian Public Hospitals (March 22, 2022; https://www.dbrsmorningstar.com/research/393975), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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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