DBRS Morningstar Confirms Windsor Regional Hospital at AA (low), Positive Trend

DBRS Limited (DBRS Morningstar) confirmed its credit rating on Windsor Regional Hospital’s (WRH or the Hospital) Senior Unsecured Debentures (the Debentures) at AA (low) with a Positive trend. The credit rating and trend reflect WRH's strong operational and financial links to the Province of Ontario (Ontario or the Province; rated AA (low) with a Positive 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 credit 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.

WRH reported a deficit of $21.4 million for the year ended March 31, 2023, compared with the balanced operating results reported in the prior year, as a result of retroactive wage adjustments after Bill 124 was struck down by the Ontario Superior Court of Justice. The 2023–24 budget forecasts an operating deficit of $29.0 million, or approximately 4.6% of revenues including wage settlements expenses. Including funding for these wage settlements, the operating deficit is expected to be at $2.6 million. DBRS Morningstar believes that operating results will likely remain somewhat pressured given consistent sectorwide inflationary and volume pressures. However, DBRS Morningstar anticipates that additional funding will be forthcoming from the Province to address budgetary pressures, along with a continued expectation from hospitals for more cost savings initiatives.

At March 31, 2023, the Hospital had $236.5 million in debt outstanding. This equates to 35.9% of revenues, down from 37.4% of revenues the previous year. The Hospital executed a 15-year managed equipment services (MES) contract in April 2023, with an incremental capital lease obligation of around $2.5 million each year, which DBRS Morningstar will include in its measure of total debt. Including the capital lease, debt is still expected to remain stable over 2024 and 2025 offset by amortization of existing loans payable. DBRS Morningstar notes that there is flexibility in WRH's current credit rating to withstand a modest increase in leverage beyond current expectations. Additionally, debt-to-revenue is expected to decline gradually as existing debt continues to amortize and no additional external debt issuance is planned.

CREDIT RATING DRIVERS
Any change to the Province's credit rating would trigger an equal change to the rating of WRH. While unlikely, the WRH's credit 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 credit 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 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/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].

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