Morningstar DBRS Confirms Credit Rating on Windsor Regional Hospital at AA, Stable Trend

DBRS Limited (Morningstar DBRS) confirmed its credit rating on Windsor Regional Hospital's (WRH or the Hospital) Senior Unsecured Debentures at AA with a Stable 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 with a Stable trend by Morningstar DBRS) and the absence of material weaknesses in the Hospital's governance, operating outlook, leverage, and financial strength.

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 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 an operating surplus of $4.4 million for the year ended March 31, 2024, compared with a deficit of $21.4 million in the prior year. The improvement reflects one-time funding received in F2023-24 to offset Bill 124 retroactive wage accruals recognized in F2022-23 fiscal year. The Hospital also incurred a one-time expense of $2.4 million related to a cyberattack it faced during the year, which resulted in an overall surplus of $2.1 million, or 0.3% of revenue. For 2024-25, the Hospital forecasts an operating deficit of $32.6 million, or approximately 4.7% of revenue excluding wage settlements. Based on preliminary estimates, the Hospital notes the deficit may be reduced with a combination of incremental base and one-time funding to address ongoing wage and operational pressures. While operating pressures are likely to persist, Morningstar DBRS anticipates additional funding will be forthcoming to keep the Hospital in a near-balanced position over the medium term.

As at March 31, 2024, the Hospital had $245.7 million in debt outstanding. This equates to 34.9% of revenue, down from 35.9% of revenue the previous year. The Hospital executed a 15-year managed equipment services contract in April 2023. Including the capital lease, Morningstar DBRS still expects debt to gradually decline over 2025 and beyond, offset by amortization of existing loans. Morningstar DBRS notes there is flexibility in WRH's current credit rating to withstand a modest increase in leverage beyond current expectations. Additionally, the debt-to-revenue ratio is likely to decline gradually as existing debt continues to amortize and no additional external debt issuance is planned.

CREDIT RATING DRIVERS
A positive or negative credit rating action will most likely be tied to changes in the Province's credit ratings. For more information about possible credit rating drivers, please refer to Morningstar DBRS' rating report on Ontario, dated June 18, 2024. Although unlikely, Morningstar DBRS may consider a lower credit rating for the Hospital than for the Province if WRH 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 factor(s) 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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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 ESG Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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 did have 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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