Fitch IBCA Inc. has determined that its rating guidelines for continuing-care retirement facilities, assisted-living facilities, and nursing homes require no adjustment, based on the results of the default-risk study it completed last year.
Fitch compared its own methodology to its competitor's published reports and said it rates more conservatively with regard to liquidity, but made no mention of Standard & Poor's having assumed much of Fitch's dominance in the sector over the last few years.
Standard & Poor's inclusion of nursing home financial results in its analysis of those credits probably has a diluting effect on its ratios, Fitch added.
"We've found that we've rated things correctly," said Robert Wetzler, a Fitch analyst. Because there is so much volatility in the health care sector, he said it is wise to emphasize the importance of cash reserves, which can cushion credits from adverse events. Fitch's CCRC portfolio is weighted toward BBB-category credits, with more than one-half having total revenues of $19 million or less. The agency believes that the expected rating for all CCRCs is BB-minus to A, while for nursing homes the rating is B-minus to BBB-plus.
Standard & Poor's analysts have said they have never given higher ratings to senior-living credits in exchange for acquiring business.
The Fitch study may be making an "apples and oranges" comparison, said Susan Hill, analyst at Standard & Poor's. She pointed out that the 11 credits that both agencies rate don't necessarily reflect Standard & Poor's entire 60-credit portfolio.
"There is something called meaningful sample size, and when you are dealing in the lower numbers, I think that there can be a lot of variation within the category," Hill said. She also pointed out that Fitch's study relies solely on financial ratios and excludes the qualitative factors.
Other than its emphasis on liquidity, Fitch's approach is similar to Standard & Poor's, Wetzler said. With respect to cash flow, Fitch's rating guidelines are exactly the same as its competitor's, he said. The shared ratings between Fitch and Standard & Poor's have been similar overall.
Fitch's entire portfolio has a lower average rating than Standard & Poor's, but most of the variance in rating distribution occurred in the BBB category. Both agencies continue to cluster their ratings towards the low end of investment grade.
"We're just comparing the differences in the data here," Wetzler said. "I'm sure their standards are high, and I know we do a good job too."
