Rating activity for the sector in the first quarter saw 11 upgrades and 11 downgrades for an equal ratio of 1.0 to 1. However, the dollar amount of upgraded debt, $2.75 billion, exceeded the dollar amount of downgraded debt, $1.44 billion, for a ratio of 1.91 to 1, reflecting the fact that many of the upgraded providers are larger systems with greater debt capacity. Smaller providers are at a disadvantage relative to their larger peers, triggering at least as many downgrades but affecting smaller debt issuances.

"While downgrades and upgrades were on par with each other during the first quarter, we expect downgrades to eventually outpace upgrades by the end of the year," said Associate Analyst Carrie Sheffield, author of the report. "This assumption reflects the pressures facing the not-for-profit healthcare sector and the fact that the majority of hospital ratings under review are tending toward downgrade."

Moody's affirmed 66 ratings in the quarter, representing 75% of all rating activity and affecting approximately $28 billion of debt, which is consistent with the longstanding historical trend of affirmations far exceeding rating changes.

"Upgrades in the first quarter were largely due to improved financial performance and better balance sheet metrics as some areas of the U.S. show economic improvement and volumes stabilized or showed growth," said Sheffield. "Downgrades continued in service areas hit hardest by the recession, many of them experiencing reduced or unfavorable reimbursements from government and commercial payers, volume declines, and management and governance problems."

Moody's found that rating downgrades were more pronounced than upgrades as providers were downgraded an average of 1.55 notches compared to upgrades averaging 1.09 notches. Three of the 11 downgrades were downgraded three notches each, indicating more intense rating pressure in the negative direction.

"Because upgrades have been driven largely by short-term increases in government payments through state provider tax programs and savings achieved by mergers or affiliation synergies, it is clear there are still fundamental weaknesses in the sector that are likely to persist over the longer-term," Sheffield said.

As of March 31, five ratings were under review, four for possible downgrade and one for possible upgrade. The amount of debt on review for downgrade, $604 million, is far greater than the debt on review for upgrade, $45 million.

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