CHICAGO — Moody's Investors Service downgraded more non-profit health care credits than it upgraded during the second quarter, a trend the ratings agency said it expects to continue throughout 2012.

Marking a new development, the amount of downgraded debt, $2.78 billion, was larger than the amount of upgraded debt, $2.11 billion, according to the rating agency's quarterly report on the sector.

Moody's downgrades have outpaced upgrades for several quarters due to sector-wide pressures, but typically the amount of upgraded debt remains larger, in part because larger systems with more debt tend to be the ones that are upgraded.

For the second quarter, nearly half of the downgraded providers had $500 million or more in total operating income, another departure from historical trends, where typically the smaller providers are hit with downgrades, Moody's said in the report, "US Not-for-Profit Healthcare Quarterly Ratings: Downgraded Debt Trumps Upgraded Debt in Second Quarter 2012, Reversing Prior Trends."

A slow economy, flat revenues, and volume declines drove the downgrades, according to Moody's, which maintains a negative outlook on the sector.

"We expect to see continued pressure on revenues from multiple sources that will persist due to the continued slow economic recovery, increasing pressure on state budgets and a large and growing federal deficit," wrote analyst Carrie Sheffield in the report. "Where upgrades have occurred, they have been due primarily to strong management, increased revenues from state provider taxes, and mergers."

Hospitals located in the relatively weak economic states of Ohio, Illinois, and Pennsylvania saw the most downgrades.

Three of the nine upgrades are located in Florida and two are in Oklahoma.

Moody's downgraded 12 hospitals and upgraded nine during the second quarter of 2012. That compares to 12 downgrades and three upgrades during the same period in 2011. The uptick in ratings actions is a sign of overall sector volatility, analysts said.

The majority of rating actions — 80% — during the second quarter were rating affirmations, affecting $55.5 billion of debt.

Most of the upgrades — 5 of 9 — were to the single-A category. Most of the downgrades — 5 of 12 — were to the below-investment grade rating category. Four of the 12 downgrades were to the Baa category.

"We expect that downgrades will continue to outpace upgrades for the full year, an expectation supported by the fact that two out of three providers currently on review have downgrade directionals," Sheffield said.

Moody's has downgraded 23 providers and upgraded 20 during the first half of 2012.


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