DBRS Morningstar Confirms Rating on Lakeridge Health at AA (low), Stable Trend

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

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 the view that hospitals remain critically important to the Province's pandemic response and continue to receive additional financial support and resources.

The coronavirus pandemic has had a significant operational impact on most hospitals in Ontario in the form of rising costs of operations, staffing and capacity constraints, and the loss of some ancillary revenues (such as parking operations), but provincial funding supports continue to mitigate these impacts and insulate hospitals from material financial deterioration. The Hospital projects that ongoing funding pressures and rising personnel costs amid staff shortages will likely result in an operating deficit in fiscal year 2022–23 and 2023–24. The Hospital will continue to work with the provincial government to develop mitigation strategies and address funding pressures.

As at March 31, 2022, Lakeridge’s debt totalled $130.2 million (estimated to be $139.7 million as at March 31, 2023), comprising Series A unsecured debentures and other unsecured obligations. While the Hospital may incur a modest amount of new loans related to planned capital projects over the medium to longer term, it will continue to prioritize financial sustainability.

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 DBRS Morningstar’s rating report on the Province of Ontario dated January 12, 2023. While it is not anticipated, DBRS Morningstar may consider a lower rating for the Hospital than for the Province if Lakeridge experiences significant weakness in operating performance, leverage, or financial strength with no management response or government support.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/ (17 May, 2022).

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

DBRS Morningstar applied the following principal methodology: Rating Canadian Public Hospitals (March 21, 2023; https://www.dbrsmorningstar.com/research/411435).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this 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. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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