CHICAGO — Moody's Investors Service said Tuesday that it downgraded $20 billion of non-profit health care debt in 2012 — a 213% increase over 2011 and a record-high amount since the ratings agency began tracking the figure in 1995.
There were 40 downgrades in 2012 compared to 34 in 2011 and 44 in 2010. Three large systems accounted for more than $13 billion of the downgraded debt.
The negative ratings actions were driven by weak operating performance and debt-service coverage, analysts said. Other challenges include liquidity declines, increased debt, management issues, and elevated pension funding pressure.
It's the seventh straight year that Moody's has downgraded more issuers than it has upgraded.
The trend will continue, said Moody's, which maintains a negative outlook on the non profit health care sector. Ten of the 40 downgrades have negative outlooks, suggesting future rating pressure.
"Looking forward, we again anticipate more downgrades than upgrades in 2013 as payer pressure accelerates," analysts wrote in the report "US Not-For-Profit Healthcare Rating Activity in 2012 Sets Record for Downgraded Debt."
The ratings agency upgraded 38 providers in 2012, which also marks a big jump from 2011, when 23 issuers saw upgrades. Upgraded debt in 2012 totaled $9.7 billion, a 64% increase over 2011.
Low interest rates in the tax-exempt bond market has helped issuers by allowing hospitals to refinance at lower rates or restructure troubled variable-rate debt.
The merger trend sweeping across the sector is another positive, Moody's said.
Nine of the 38 upgrades in 2012 were due to consolidation. Of the seven multi-notch upgrades, six were due to mergers or acquisitions.
"The major caveat to more downgrades may be increased merger or acquisition activity, which could slow the rate of downgrades in 2013 and beyond if consolidations produce expects operating benefits or if the higher-rated system guarantees the debt of the lower-rated system, or refinances the debt," Moody's said. "However, short-term disruptions that often accompany consolidation strategies can sometimes lead to rapid credit deterioration."
Of the $20 billion of downgraded debt, $13 billion came from three providers: Catholic Health Initiatives in Colorado; Dignity Health in California, and Memorial Sloan-Kettering Cancer Center in New York.
"Even so, the wide margin between downgraded debt and upgraded debt in not-for-profit health care is similar to the $311 billion of public debt downgraded across all of Moody's public finance sectors compared to $24 billion of debt upgraded," the agency said in the report.
The majority of downgraded providers in 2012 — 63% — were small, stand-alone providers with total operating revenue of $500 million or less. In contrast, only 5% of the downgraded providers were multi-state providers. The numbers illustrate the so-called credit gap that characterizes the sector, with the smaller, lower rated credits generally more vulnerable to challenges than the larger, higher-rated systems.
Geographically, the Northeast and Midwest saw the most downgrades, Moody's said. Pennsylvania saw nine, the most of any state, which was also true in 2011. Providers in that state, as well as in Ohio and a few other states, face a combination of a weak economy and state budget cuts, Moody's said.
The Midwest saw 11 downgrades, with three each in Ohio, Illinois, and Michigan.
Six of the 40 providers were downgraded by two or more notches. West Penn Allegheny Health System was pushed down three notches amid a delayed and litigious acquisition agreement with Highmark Inc.
As usual, the vast majority of ratings actions were affirmations. Moody's affirmed 278 providers last year, representing 78% of all ratings actions and $126.2 billion of outstanding debt.
