CHICAGO — Things could be looking up for nonprofit health care, though the outlook is less positive for the troubled senior-living sector, according to a pair of 2011 outlook reports Fitch Ratings is poised to release Monday.
The rating agency revised its outlook to stable from negative on the nonprofit acute-care sector, saying that a series of measures aimed at mitigating the recession have preserved or boosted creditworthiness across the sector.
Fitch retained its negative outlook for the senior-living sector, chiefly because of its ties to a weak real estate market.
“The depressed real estate market is still having an impact on the velocity and level of unit sales in the senior-living sector,” said Jim LeBuhn, the head of Fitch’s public finance health care group.
LeBuhn took over as sector head after Jeff Schaub left to become head of Fitch’s public finance operations group.
The senior-living sector is vulnerable to housing market fluctuations because it depends on the ability of seniors to sell their homes and move into its facilities. U.S. housing prices will drop 10% this year, Fitch said, which means fewer seniors may be willing or able to sell their homes.
Like many municipal borrowers, both the senior-living and the nonprofit health care sectors could face challenges securing bank credit in 2011, LeBuhn said.
Fitch estimates that $53 billion of bank credit facilities supporting municipal debt will expire in 2011. That could mean more competition for bank support as well as higher fees or even the inability of lower-rated credits to secure credit, forcing them to fix out variable-rate debt in a possibly unfavorable interest-rate environment.
“Given the large amount of expiring letters of credit, we’re identifying it as an elevated risk factor,” LeBuhn said.
Senior-living providers could be further constrained by the expiration of the expanded bank-qualified exemption that was part of the American Recovery and Reinvestment Act. The exemption provision temporarily raised to $30 million from $10 million the small issuer limit for bank-qualified bonds.
Many senior-living facility debt issuers took advantage of the provision, and could be hurt by its expiration, Fitch said.
“The ending of that expanded bank qualification is going to take one avenue of financing out and may require some of our senior-living providers to access the fixed-rate market at higher rates,” LeBuhn said. Sluggish demand for senior-living units could mean modest 2011 capital spending. “There isn’t much of a need to invest in expansions or renovations,” LeBuhn said.
Hospital capital spending is still expected to remain at 2010 levels, according to Fitch. The impact of the national health care law on acute-care providers will likely be limited in 2011, and providers that are preparing for the new law could see some benefits, Fitch said.
“The industry is positioning itself for health care reform from the expense side,” with various measures such as improved information technology and quality and safety measures, LeBuhn said. “The full effect on the revenue side clearly is expected to limit the increase of reimbursement rates, but right now management’s ability to control expenses exceeds the lower trajectory of rate increases.”
Fitch will discuss the reports in a teleconference Wednesday at 2 p.m. Eastern Standard Time.
