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.

For 2022–23, the Hospital has indicated that actual performance remains on track with expectations that year-end results will not fall outside the Hospital Service Accountability Agreement balanced position. As costs arising from the ongoing evolution of the pandemic, supply chain issues, and still-high inflation persist, hospitals remain in discussions with the Province for additional/incremental funding. As at F2022, the hospital reported a surplus of $2.8 million relative to a $4.6 million surplus (excluding a one-time working capital grant of $26.8 million) in the prior year.

SHN’s debt levels are manageable, with a debt-to-revenue ratio of 15.9% (F2022), 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 material debt funding over the medium term. Future capital projects may see the Hospital adding new bank loans, but SHN indicates that a bond issuance remains unlikely.

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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor 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 applicable to the rating is Rating Canadian Public Hospitals (https://www.dbrsmorningstar.com/research/393975/rating-canadian-public-hospitals; March 22, 2022).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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