Morningstar DBRS Assigns Rating of AA to Scarborough Health Network, Stable Trend

DBRS Limited (Morningstar DBRS) assigned an Issuer Rating of AA with a Stable trend to Scarborough Health Network (SHN or the Hospital) and confirmed the rating on the Hospital's Senior Unsecured Debentures at AA with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings are supported by our assessment that government support is very strong for SHN. The Hospital is significantly important to the healthcare system of the Province of Ontario (Ontario or the Province) as evidenced by its position as the third-largest community hospital in the Province and by the size of community it serves. This strong government support would mitigate any potential weakness arising from SNH's own intrinsic assessment, such as any material weaknesses in the Hospital's competitive position, its debt and liquidity profile, and its financial metrics.

CREDIT RATING DRIVERS
A change in Ontario's credit ratings would lead to a commensurate change in the Hospital's credit rating.

The credit rating would be downgraded if SHN experienced a material deficiency or weakness in its intrinsic assessment, such as a sustained deterioration in its financial performance, without management response.

CREDIT RATING RATIONALE
The Hospital benefits from very strong government support. SHN is a publicly owned and funded hospital and operates as the third-largest community hospital in Ontario, serving more than 850,000 people. A disruption in healthcare services at SHN would be detrimental to a significant share of the provincial population and to numerous clinical mandates in the region and the Province. Ontario provides significant funding and strong oversight for the Hospital's operations. The healthcare sector remains a critical priority for Ontario and the provincial government has a track record of providing additional funding to hospitals when necessary.

The Hospital provides a wide range of healthcare services including emergency care, specialized treatments, surgical procedures, and outpatient services. SHN is also a teaching hospital with a growing research profile and favourable quality of clinical care. The population that the hospital serves is aging, has high rates of chronic diseases, and includes a significant portion of patients without a primary care physician. Accordingly, SHN is facing increases in patient volumes never before seen.

The Hospital reported a surplus of $3.0 million for the year ended March 31, 2024, relative to a deficit of $24.5 million in the prior year. SHN continues to focus on program delivery realignment and various efficiency measures to mitigate current cost pressures. Total debt levels continue to decline, with total debt of $124.2 million at F2024. The Hospital benefits from low debt levels with net debt to EBITDA of 1.2 times (x) and a debt-to-capitalization ratio of 16.2%. Moreover, EBITDA maximum annual debt service coverage was 32.6x. SHN continues to demonstrate stable and predictable cash flows both in stable government funding and strong internal liquidity and cash management. SHN anticipates that it will need to raise additional debt in the near future to fund some of its planned major redevelopment projects as the Hospital's infrastructure is aging.

Morningstar DBRS assigned the Issuer Rating in line with its application of the Global Methodology for Rating Public and Not-For-Profit Hospitals and Health Systems. For more information, please visit https://dbrs.morningstar.com/research/444620.

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:
-- Global Methodology for Rating Public and Not-For-Profit Hospitals and Health Systems (December 16, 2024), https://dbrs.morningstar.com/research/444619

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 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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