DBRS Morningstar Confirms University Health Network at AA (low), Positive Trend

DBRS Limited (DBRS Morningstar) confirmed the Secured Bonds rating of University Health Network (UHN or the Hospital) at AA (low) with a Positive trend. The confirmation of the rating and Positive trend reflects UHN's strong operational and financial links to the Province of Ontario (the Province; rated AA (low) with a Positive trend by DBRS Morningstar) and the absence of any material weakness in the Hospital's governance, operating performance, leverage, and financial strength. As the largest hospital network in Ontario and Canada, UHN receives a high level of public funding and is subject to considerable government oversight.

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.

UHN reported a deficit of $48.0 million in 2022–23, a decline from the 2021–22 surplus of $8.8 million, which was solely the result of an accrual of retroactive salary adjustments after Bill 124 was struck down by the Ontario Superior Court. The Hospital remains committed to targeting an operating surplus, consistent with previous years, and DBRS Morningstar believes that additional funding will be forthcoming from the Province to address rising compensation costs.

UHN's debt burden rose in 2022–23, after the Hospital drew additional funds from its $250 million unsecured loan agreement with the Ontario Financing Authority to fund the Hospital’s Synapse project related to the implementation of its new Health Information System and supporting projects. Meanwhile, UHN’s issuance of Secured Bonds matured on December 8, 2022. At March 31, 2023, total debt increased to $206.7 million, compared with $198.5 million in the previous year. UHN does not anticipate any new borrowing in the near term, though the loan facility will be gradually drawn down, thereby increasing total debt.

RATING DRIVERS
Any change to the Province's rating would trigger an equal change to the rating of UHN's Secured Bonds. While unlikely, UHN's rating could fall below that of the Province should the Hospital exhibit material weakness in operations, management/governance, operating results, leverage, or financial strength.

The Rating Drivers for the Province can be found at https://www.dbrsmorningstar.com/research/415588/dbrs-morningstar-changes-the-trend-on-the-province-of-ontario-to-positive-confirms-ratings-at-aa-low.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Rating Canadian Public Hospitals (March 21, 2023), https://www.dbrsmorningstar.com/research/411435

The credit 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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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.

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].

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