Morningstar DBRS Confirms University Health Network at AA, Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Secured Bonds rating of University Health Network (UHN or the Hospital) at AA with a Stable trend. The confirmation of the credit rating and trend reflects UHN's strong operational and financial links to the Province of Ontario (the Province; rated AA with a Stable trend by Morningstar DBRS) 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 in Canada, UHN receives a high level of public funding and is subject to considerable government oversight.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS 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. Morningstar DBRS 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.

For the year ended March 31, 2024, UHN reported a surplus of $19.5 million, an improvement from the 2022-23 deficit of $48.0 million. The year-over-year performance can be attributed to the retroactive salary adjustments after Bill 124 was struck down by the Ontario Superior Court of Justice. The Hospital accrued the payments in F2023 but received the corresponding government funding during F2024. The Hospital remains committed to targeting an operating surplus, consistent with previous years, and Morningstar DBRS believes that additional funding will be forthcoming from the Province to address rising compensation costs.

UHN's debt burden rose in 2023-24, after it fully drew 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. At March 31, 2024, total debt increased to $330.4 million, compared with $206.7 million in the previous year. UHN does not anticipate any new borrowing in the near term.

CREDIT RATING DRIVERS
If Morningstar DBRS were to change the Province's credit rating, it would apply an equal change to the credit rating of UHN's Secured Bonds. While unlikely, UHN'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://dbrs.morningstar.com/research/434027.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant 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 at (January 23, 2024), https://dbrs.morningstar.com/research/427030.

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

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 methodology 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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