DBRS Morningstar Confirms McGill University Health Centre Rating at AA (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed its rating on the Series A Senior Unsecured Debentures (the Debentures) of McGill University Health Centre/Centre universitaire de santé McGill (MUHC or the Hospital) at AA (low) with a Stable trend. The rating reflects MUHC's strong operational and financial links to the Province of Québec (Québec or the Province; rated AA (low) with a Stable trend by DBRS Morningstar) and the absence of any material weakness in the Hospital's governance, operating performance, leverage, and financial strength.

DBRS Morningstar assigns the same rating to debt issued by an important hospital as to its provincial government, 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 those hospitals that are fundamentally important to the provincial healthcare system. 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.

Operating results weakened slightly during 2020–21 with MUHC reporting a deficit of $15.6 million compared with the prior year deficit of $2.8 million. The Hospital's 2021–22 budget, which was prepared without any adjustments for the pandemic, projects a deficit of $57 million with higher costs largely driven by the expensive oncology drugs (a sectorwide trend). While the Hospital continues to collaborate with the Province to develop a budget equilibrium plan, the current deficit projection remains below 1% of budgeted revenues.

Hospitals in Québec have gradually ramped up operations to address more non-urgent surgeries and are now largely back to pre-pandemic levels. However, the near-term outlook remains uncertain for hospital operations as transmission of new coronavirus variants remains a concern. Nevertheless, DBRS Morningstar anticipates financial results to be largely insulated as a result of continued government funding. In the medium term, the improvement in the Provincial budget outlook and increased funding for the healthcare sector are viewed positively despite expectations from hospitals to look for operating efficiencies and cut down on budgeted administrative costs and other expenses.

MUHC has experienced several governance and management challenges in past years, but these have now largely been addressed. DBRS Morningstar believes the Hospital's decision to extend Dr. Pierre Gfeller's term as the permanent president and executive director (PED since 2018) will provide stability to the Hospital's operations in the midst of a challenging operating environment.

RATING DRIVERS
A positive or negative rating action will most likely be tied to changes in the Province’s Issuer Rating and Long-Term Debt rating. While unlikely, MUHC’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 Public Universities (May 5, 2021; https://www.dbrsmorningstar.com/research/377955), 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).

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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