DBRS Morningstar Confirms Hamilton Health Sciences Corporation at AA (low), Positive 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 Positive trend. The credit rating and trend reflect HHSC's importance to the Province of Ontario's (Ontario or the Province; rated AA (low) with a Positive trend by DBRS Morningstar) healthcare system and its strong operational and financial links to the Province. The rating also reflects the absence of material weaknesses in the Hospital’s governance, operating outlook, leverage, and financial strength.

DBRS Morningstar assigns the same credit rating to debt issued by an important hospital as it does to a provincial government, 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 Hospital's 2023–24 budget forecasts an operating deficit of $56.0 million, driven by inflationary pressures and unfunded patient volumes and beds. Management expects to receive funding to support currently unfunded beds and that, along with additional funding to address inflationary pressures (including retroactive wage costs related to the prior year), may allow HHSC to post balanced results on a consolidated basis. DBRS Morningstar believes that operating results will likely remain pressured given the inflationary and volume pressures within the sector. Nevertheless, and despite the lack of clarity on the timing, DBRS Morningstar expects that, similar to last year, additional funding will be forthcoming from the Province to address budgetary pressures and provide for the unfunded beds. However, the Province’s expectation of more stringent cost savings initiatives from hospitals will persist.

HHSC's total debt increased to $369.7 million at March 31, 2023, compared with $353.3 million in the previous year. The increase was driven by the full utilization of the $53.0 million capital loan facility to revitalize the co-generation assets acquired from Bay Area Health Trust. This equated to a debt-to-revenue ratio of 20.8%, modestly higher than the ratio of 20.3% in the previous year. The Hospital does not anticipate any debt funding over the medium term and, as such, HHSC’s total debt burden, including capital-lease obligations and bank indebtedness, is likely to decline modestly as existing debt amortizes, largely in line with DBRS Morningstar's earlier expectations.

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

The credit rating drivers for the Province can be found at https://www.dbrsmorningstar.com/research/415588.

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/416784 (July 4, 2023).

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 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.

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 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. 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.

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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