The $3.2 billion of upgraded debt of the not-for-profit healthcare sector in the third quarter far surpassed the dollar amount of downgraded debt, $957.3 million, for a ratio of 3.3 to 1, says Moody's Investors Service.

The number of upgrades, 12, also surpassed the number of downgrades, 7, for a ratio of 1.7 to 1.

The predominance of upgrades reflected an increase in merger and acquisition activity in the sector and not a fundamental change in its underlying credit conditions, which remain negative, says Moody's.

"Half of the third-quarter upgrades were the result of consolidations or favorable lease agreements rather than gradual improvement in fundamentalcredit quality," says Moody's Associate Analyst Carrie Sheffield, author of the report "US Not-For-Profit Healthcare Quarterly Ratings: Driven by M&A Activity, Upgrades Surpass Downgrades in Third Quarter 2012."

"The growing trend toward hospital consolidation is positive for the financial health of many hospitals since it generally enables greater operational efficiencies and leverage in negotiations with payers," Sheffield writes.

For the first nine months of 2012 there have been 33 upgrades and 30 downgrades. Moody's is now expecting upgrades and downgrades for the year to come out roughly even; earlier in the year Moody's expected downgrades to surpass upgrades in 2012. The dollar amount of downgraded debt will likely exceed that of upgraded debt, however, after the rating downgrades of two large hospital systems earlier this month.

As usual, rating affirmations far exceeded rating changes in the third quarter. During the quarter Moody's affirmed 76 ratings, representing 80% of all rating actions and affecting $33.5 billion of total debt. Three of the affirmations had outlook changes in a negative direction and 10 had outlook changes in the positive direction.

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