DBRS Morningstar Confirms Rating on Windsor Regional Hospital at AA (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed its rating on Windsor Regional Hospital’s (WRH or the Hospital) Senior Unsecured Debentures (the Debentures) at AA (low) with a Stable trend. The rating reflects WRH'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 outlook, 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. 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. 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.

After posting consecutive surpluses over the past two years, WRH reported balanced results in 2021–22, largely reflecting the absence of one-time working capital funding received in the prior year. Excluding this one-time funding and minor nonrecurring revenues in the prior year, WRH's results were largely unchanged. For 2022–23, the Province has confirmed that it will continue to mitigate incremental pandemic-related costs similar to the prior year. Notwithstanding initial expectations of an operating deficit, Hospital management has now indicated that the bottom-line operating results will be balanced following a recent funding confirmation from the ministry of health for 18 beds that were previously being operated on an unfunded basis. DBRS Morningstar expects provincial supports will likely persist to insulate hospitals from any additional financial pressures.

At March 31, 2022, the Hospital had $239.6 million in debt outstanding. This equates to 37.4% of revenues, down from 41.3% of revenues the previous year. The Hospital expects to execute a 15-year managed equipment services contract during 2022–23, with a portion of the contract expected to be recognized as a capital lease obligation, which DBRS Morningstar will include in its measure of total debt. Nevertheless, DBRS Morningstar expects debt-to-revenue to gradually decline as existing debt continues to amortize, and no additional external debt issuance is planned. Although the actual accounting of the capital lease remains to be seen, DBRS Morningstar notes that there is flexibility in WRH's current rating to withstand a modest increase in leverage beyond current 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 WRH'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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