Morningstar DBRS Confirms Hamilton Health Sciences Corporation's Senior Unsecured Debentures at AA, Stable Trend

DBRS Limited (Morningstar DBRS) confirmed its credit rating on Hamilton Health Sciences Corporation's (HHSC or the Hospital) Senior Unsecured Debentures at AA with a Stable trend. The credit rating and trend reflect HHSC's importance to the Province of Ontario's (Ontario or the Province; rated AA with a Stable trend) healthcare system and its strong operational and financial links to the Province. The credit rating also reflects 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 it does to a 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.

The 2024-25 budget forecasts an operating deficit of around $112.0 million, driven by inflationary cost pressures and unfunded patient volumes. Despite the forecast shortfall, management expects to receive additional funding to support unfunded beds and address inflationary pressures¿including retroactive wage costs related to Bill 124¿which may allow HHSC to substantially reduce the deficit on a consolidated basis. The Hospital has also undertaken a hospital-wide review to find efficiencies at the clinical and administrative levels to identify cost savings to offset some of the operating challenges. While operating pressures are likely to persist, Morningstar DBRS anticipates that additional provincial funding will be forthcoming to keep the Hospital in a near-balanced position over the medium term.

HHSC's total debt decreased to $357.0 million at March 31, 2024, compared with $369.7 million in the previous year, driven by amortization of existing debt. This equates to a debt-to-revenue ratio of 18.0%, down from 20.8% the previous year. While the Hospital could potentially see some increases in short-term borrowing to manage temporary operating shortfalls, the Hospital does not anticipate any long-term debt issuance over the medium term and, as such, HHSC's total debt burden, including capital-lease obligations and bank indebtedness, is likely to decline modestly as existing long-term debt amortizes.

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 HHSC 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 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) at 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 Environmental, Social, and Governance 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 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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