DBRS Morningstar Confirms Rating on Hamilton Health Sciences Corporation at AA (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Senior Unsecured Debentures rating of Hamilton Health Sciences Corporation (HHSC or the Hospital) at AA (low) with a Stable trend. The rating is based on DBRS Morningstar’s view on HHSC’s importance to the Province of Ontario’s (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) healthcare system and strong operational and financial links to Ontario. The rating also reflects the absence of material weaknesses in the Hospital’s governance, operating performance, leverage, and financial strength.

DBRS Morningstar assigns the same rating to important hospitals as to their provincial governments, provided that there are no material deficiencies or concerns. This practice reflects DBRS Morningstar’s 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.

HHSC has a strong brand and reputation, occupying a strategic position within the provincial healthcare system as the largest care provider in the Hamilton-Niagara area and one of the largest academic health sciences centres in Ontario. The Hospital is the regional referral centre for specialized services in numerous clinical areas and is a leader in Canadian medical research; as a result, a disruption in clinical services would be highly detrimental to a significant share of the provincial population.

HHSC has a track record of positive operating results, despite increasing volumes/acuity and constrained funding growth. In 2019–20, the Hospital recorded an operating surplus of $16.7 million before a designated transfer/gift of $16.9 million was made to its charitable arm, Hamilton Health Sciences Research Institute, which led to a small consolidated deficit of $0.2 million; in 2018–19, the Hospital recorded a surplus of $6.2 million.

The Coronavirus Disease (COVID-19) pandemic prompted hospitals to reduce nonessential activities to limit the spread of the coronavirus and to provide increased capacity for coronavirus patients. HHSC is gradually ramping up operations and expanding capacity to address volume pressures, which is supported by the Province’s announcement of a $116 million investment to increase hospital beds in Ontario.

The Hospital anticipates a modest operating deficit in 2020–21 as consistently high unfunded occupancy rates and loss of some ancillary revenue (such as parking operations) weigh on operating results. While the Hospital’s medium-term budget outlook is somewhat uncertain, healthcare remains a priority for the Province as is evident in the recent budget, which includes significant funding toward healthcare delivery as the government continues to combat the coronavirus.

At March 31, 2020, HHSC had $306.2 million in total debt, including capital-lease obligations ($3.6 million), long-term debt ($261.7 million), and Bay Area Health Trust’s guaranteed debt ($40.9 million). The debt-to-revenue ratio was 19.1%, which is modestly lower compared with 20.2% in F2019. Interest costs continue to remain modest at 0.4% of total revenues. The Hospital estimates total debt to peak at $315 million, or roughly 26.5% of revenue in 2021–22.

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 the Province of Ontario Rating Report dated May 5, 2020. While not anticipated, DBRS Morningstar may consider a lower rating for the Hospital than for the Province if HHSC experiences material deficiency or weakness in additional rating factors, such as a sustained deterioration in its annual operating performance, with no management response or government support.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Canadian Public Hospitals (April 20, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the report, contact us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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