DBRS Limited (DBRS) assigned a provisional rating of AA (low) with a Stable trend to the Senior Unsecured Debentures of Hamilton Health Sciences Corporation (HHSC or the Hospital). The rating is based on DBRS’s assessment that HHSC is highly essential to the Province of Ontario’s (Ontario or the Province; rated AA (low) with a Stable trend by DBRS) health-care system. Institutions that are highly essential to the health-care system will generally be rated in line with the provincial government, reflecting the greatest likelihood of implicit support and strongest linkage to the credit profile of the government funder. DBRS notes that there are no material deficiencies in additional rating factors, including the Hospital’s debt burden, operating performance, financial resources and liquidity as well as management and governance that warrant differentiation from the provincial rating.
HHSC has a strong brand and reputation, occupying a strategic position within the provincial health-care system as the largest care provider in the Hamilton-Niagara region and one of the largest academic health sciences centres in Ontario. HHSC’s five unique hospitals, regional cancer centre and related facilities directly serve the Hamilton-Niagara region and provide tertiary care to a larger geographic area of south-central Ontario. The Hospital has very specialized expertise and mandates in numerous clinical areas and is a leading Canadian medical research hub. As a result, a disruption in clinical services would be highly detrimental to a significant share of the population.
HHSC plans to issue up to $200.0 million in senior unsecured debentures to fund a major digital health transformation plan and other capital priorities. The Hospital also plans to enter a contractual Managed Equipment Service capital lease program for the renewal of diagnostic imaging and other clinical equipment. While these financing plans will materially increase the total debt burden, debt servicing is expected to remain manageable and efficiency gains should create budget flexibility over the medium term. Ongoing government support and internal contributions to improve working capital levels should continue to improve balance-sheet flexibility.
The operating environment for Ontario hospitals is constrained, but stable. The recently elected Progressive Conservative government presents some uncertainty with its approach to hospital funding, but DBRS does not anticipate significant changes to funding envelopes in the near term. The government has committed to alleviating hospital capacity pressures by delivering new long-term care beds and providing stable and predictable funding, but general fiscal restraint may result in minimal funding growth.
The Hospital has a strong financial management team and budget framework, which helps to mitigate risk and lends stability to results. HHSC has a record of positive operating performance despite a challenging operating environment with persistent real cost escalation, limited funding growth as well as rising patient volumes and acuity. In 2017-18, HHSC recorded a modest consolidated surplus of $4.9 million or 0.3% of revenue after designated transfers to the affiliated Hamilton Health Sciences Research Institute.
A change in the Province’s credit rating would trigger an equal change in HHSC’s rating, given the linkage to the Province’s credit profile. While not anticipated, the emergence of a material deficiency or weakness in additional rating factors, such as a sustained deterioration in the Hospitals’ annual operating performance with no management response or government support, could lead to downward rating pressure from the provincial rating. Positive rating action is not contemplated as the Hospital’s Senior Unsecured Debentures are rated in line with the provincial government funder.
All figures are in Canadian dollars unless otherwise noted.
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