Preliminary Figures Show Hospitals Weakened in 2008, Moody's Says

CHICAGO - As nonprofit hospitals begin to release their 2008 audits, preliminary numbers show a weakening across all significant ratios and all rating categories, Moody's Investors Service said in a new report out this week.

Among the more surprising findings is that even those providers whose fiscal year ends June 30 - well before many of 2008's biggest financial declines took hold - reported drops, said Moody's analyst Brad Spielman, who wrote the preliminary median report.

"The pressures we experienced last year were more pronounced in the fourth quarter, but were already material by halfway through the year," Spielman said. "A lot of the medians are for credits whose fiscal years end June 30, and they nevertheless already show declines."

Moody's expects to release a full median report by the summer, when most 2008 audits have been completed. But early indications show that the trends that have prompted Moody's, as well as Standard & Poor's and Fitch Ratings, to put a negative outlook on the sector show no signs of abating.

"There was so much happening in the latter half of the year both with respect to investment returns and operating results, these preliminary medians understate what we're going to see in the final medians," Spielman said.

The biggest problems plaguing the sector are lack of access to credit markets, weakened operating performance, declines in liquidity and volume, and a worsening payer mix, according to Moody's.

While in the past analysts have noted a growing gap between smaller, lower-rated credits and larger, higher-rated credits, now the negative trends are hitting all rating categories in the sector, Moody's said.

For example, median days' cash on hand for Aa-rated credits declined to 222 days in 2008 from 259 days in 2007, for A-rated credits the median fell to 160 days from 176 days, and for Baa-rated credits it declined to 106 days from 120 days.

"We anticipate that full-year median liquidity ratios may decline by another 15% to 20%," the report said.

The sector's weakening is reflected in part by the recent uptick in downgrades, which, unlike annual medians, reflect more current fiscal situations.

The declines also mean more pressure on debt service coverage. Debt service coverage is affected by both balance sheets and operating performance, Spielman said.

The declines in those areas will likely mean a decline in the amount of revenue available for debt service for many issuers. Preliminary medians show that maximum annual debt service coverage in the sector declined slightly to 4.0 times in 2008 from 4.1 times the previous year.

"That decline will be more pronounced in the final medians and in operating results," Spielman predicted.

Moody's doesn't track capital spending in its median reports, but anecdotal information seems to confirm what many municipal market participants already know - that new-money health care issuance has been significantly down over the last several months.

"Beginning in the fourth quarter of last year and continuing into this year, a lot of organizations have tried to be very responsive to changes in their investment balances and are taking hard looks at their capital spending and in many cases delaying projects," Spielman said.

But recently health care debt issuance, especially fixed-rate debt among higher-rated credits, has started to pick up again, and analysts are starting to hear from issuers interested in getting new ratings lined up, he said.

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Healthcare industry
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