DBRS Morningstar Confirms University Health Network at AA (low), Stable Trend

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

DBRS Morningstar assigns the same rating to debt issued by important hospitals as to their provincial governments, provided that there are no material deficiencies or concerns. DBRS Morningstar 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 Coronavirus Disease (COVID-19) pandemic has reinforced this view as hospitals remain critically important to the Province's coronavirus response and continue to receive additional financial support and resources.

Despite the ongoing impact of the pandemic throughout the fiscal year, UHN continues to report positive operating results, recording a surplus of $38.1 million in 2020–21. The impact of the coronavirus pandemic has been significant in 2020–21 as surging coronavirus infections created staffing and capacity constraints on hospitals. Rising costs of operations and loss of some ancillary revenues (such as parking operations) have affected operating results; however, significant provincial funding support to the healthcare sector, including recently announced support (see DBRS Morningstar’s commentary “Ontario Unveils New Funding for Public Hospitals,” March 26, 2021), will offset the deterioration to a large extent. Furthermore, UHN has played a central role for the Province in purchasing personal protective equipment for various organizations, demonstrating its continued importance to the broader provincial healthcare system. The Hospital continues to target an operating surplus of more than $30.0 million.

UHN’s debt burden continues to fall, primarily driven by amortization of the Secured Bonds. At March 31, 2021, total debt was $141.1 million, down from $166.6 million the previous year. UHN also recently entered into an agreement with the Ontario Financing Authority to borrow up to $250 million (unsecured and not rated by DBRS Morningstar) for financing the Hospital’s new Health Information System as part of the Clinical Transformation Project. The updated Strategic Plan introduced in 2019 and Facilities Master Plan introduced in 2020 will continue to guide capital investment priorities and financing requirements in the near to medium term. In addition to this debt, UHN will also look to other sources to fund capital plans, which may include Ontario Ministry of Health and Long-Term Care funds, foundations, and contributions from operations. UHN does not anticipate any new borrowing through 2021–22; however, the Hospital may consider additional debt in the medium term as the Facilities Master Plan evolves.

RATING DRIVERS
Any change to Ontario's rating would trigger an equal change to the rating of UHN's Secured Bonds. While unlikely, UHN's rating could fall below that of the Province should the Hospital exhibit material weakness in operations, management/governance, operating results, leverage, or financial strength.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Canadian Public Hospitals (March 23, 2021; https://www.dbrsmorningstar.com/research/375734), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 this 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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