DBRS Morningstar Assigns Provisional Rating of AA (low), Stable Trend, to The Ottawa Hospital

DBRS Limited (DBRS Morningstar) assigned a provisional rating of AA (low) with a Stable trend to The Ottawa Hospital's (TOH or the Hospital) proposed Series A Senior Unsecured Debentures (the Debentures). The rating reflects TOH's strong operational and financial links to the Province of Ontario (Ontario or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) and the absence of material weaknesses in the Hospital’s governance, operating outlook, 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.

TOH is one of the largest acute-care, teaching, and research hospitals in Canada serving a population of approximately 1.3 million people across eastern Ontario, western Québec, and Nunavut. With operations spread across three campuses in the Ottawa region, TOH is affiliated with the world-renowned University of Ottawa Heart Institute and ranks among the top five hospitals in Canada for overall research funding. Any disruption in healthcare services at TOH would be detrimental to healthcare delivery in eastern Ontario and the surrounding areas, thereby demonstrating TOH's importance to the provincial healthcare system.

In the 2022–23 budget, TOH planned for a structural deficit of $15.0 million. This reflects historical underfunding stemming from a funding formula change in 2017–18, and TOH has been working with the Ontario Ministry of Health to remedy it. Based on the mid-year fiscal update, the Hospital notes that the structural deficit has been reduced to $12.0 million, and it continues to work with the Province to address the shortfall. Following an Ontario Court of Appeal decision to repeal Bill 124, DBRS Morningstar expects that retroactive salary increases will result in a larger-than-planned deficit when final 2022–23 results are released.

For 2023–24, new funding assumptions have yet to be provided by the Ministry and TOH is conservatively assuming a continuation of the structural deficit, continuation of cost pressures related to the pandemic recovery, and ongoing collective bargaining, which will add to cost pressures following the repeal of Bill 124. The Hospital anticipates that a combination of budget efficiency measures and additional provincial funding will be required to minimize the potential deficit.

The Hospital plans to issue $275.0 million in Debentures to fund a new parking structure, and the Local Share Plan requirements of a new hospital facility to be built as part of TOH's new Civic Campus. Following the proposed issuance, DBRS Morningstar projects that the Hospital’s total debt will be approximately $358.9 million at March 31, 2024. Similarly, interest costs will rise to approximately $16.9 million on a full-year basis, equivalent to roughly 1.1% of revenue. DBRS Morningstar anticipates that the Hospital will establish a voluntary internal debt retirement fund to repay the Debentures.

RATING DRIVERS
DBRS Morningstar will likely tie any positive or negative rating action to changes in Ontario’s Issuer
Rating and Long-Term Debt rating, all else unchanged. A positive rating action would require an
upgrade of the Province’s ratings. While a downgrade of Ontario’s ratings would lead to an equal
change in the Hospital’s rating, significant changes in operations, management/governance, operating
results, leverage, or financial strength could also negatively affect TOH's rating.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (May 17, 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/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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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