Morningstar DBRS Confirms Credit Rating on The Ottawa Hospital at AA (low), Positive Trend

DBRS Limited (Morningstar DBRS) confirmed the credit rating on The Ottawa Hospital's (TOH or the Hospital) Series A Senior Unsecured Debentures (the Series A Debentures) at AA (low) with a Positive trend. The rating reflects TOH's strong operational and financial links to the Province of Ontario (Ontario or the Province; rated AA (low) with a Positive trend by Morningstar DBRS) and the absence of material weaknesses in the Hospital's governance, operating outlook, leverage, and financial strength.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS assigns the same rating to important hospitals as to their provincial governments, provided that there are no material deficiencies or concerns. This practice reflects Morningstar DBRS' 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.

Based on preliminary results, the Hospital posted a deficit of $6.2 million for 2023¿24, substantially lower than the budgeted deficit of $45.8 million supported by a combination of incremental base and one-time funding. For 2024¿25, new funding assumptions have yet to be provided by the Ministry and TOH is conservatively assuming a larger structural deficit driven by continuation of pressures related to legacy pandemic costs and inflationary pressures including higher labour costs. The Hospital anticipates that a combination of budget efficiency measures and additional provincial funding will be required to minimize the potential deficit.

Following the issuance of the $275.0 million Series A Debentures during 2023-24, the Hospital's total debt is estimated at $358.0 million on March 31, 2024, or approximately 23.0% of total revenues. Morningstar DBRS anticipates that the Hospital will establish a voluntary internal debt retirement fund to repay the Debentures.

CREDIT RATING DRIVERS
A positive or negative rating action will most likely be tied to changes in the Province's credit rating. For more information about possible rating drivers, please refer to Morningstar DBRS's rating report on the Province of Ontario, dated December 18, 2023. Although unlikely, Morningstar DBRS may consider a lower rating for the Hospital than for the Province if TOH experiences significant sustained weakness in operating performance, leverage, or financial strength with no management response or government support.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

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

Morningstar DBRS applied the following principal methodology:

Rating Canadian Public Hospitals (March 21, 2024)
https://dbrs.morningstar.com/research/429932/rating-canadian-public-hospitals

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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