CHICAGO — The nonprofit health care sector’s brief post-2008 recovery is about to deteriorate in the face of myriad pressures, credit analysts warned in a pair of reports Wednesday.
Standard & Poor’s and Moody’s Investors Service disagreed on what to expect this year, but agreed that the next several years could be rough due to weak revenue, reimbursement challenges, and uncertainty surrounding the new health care law.
Moody’s, which has kept a negative outlook on the sector for five of the last 10 years, announced it is maintaining that outlook for 2012.
S&P, however, said it expects the sector to continue to enjoy recent stability achieved in 2011 through most of the year before significant weakness sets in.
“We expect ratings to be stable in 2012 but we expect the operating environment to deteriorate, and we’re already seeing signs it’s doing that,” S&P analyst Martin Arrick said during a webcast that accompanied the report, “The U.S. Not-For-Profit Health Care Sector’s Rating Stability is Vulnerable to Headwinds after 2012.”
“That deterioration is going to worsen over time,” said Arrick, the report’s author.
New-money issuance is expected to remain low compared to pre-2008 levels. Issuance fell by 15% to $26.7 billion in 2011, according to Thomson Reuters. Refundings, however, will remain strong due to low interest rates. The refundings will continue the shift by many providers to a more conservative debt policy that avoids risks associated with variable-rate debt.
Providers that are embarking on capital projects are often tapping cash to finance the project instead of debt, Moody’s said.
“While this strategy protects current debt-service coverage requirements, it reduces the balance-sheet cushion and may reduce liquidity, weakening cash to debt measures,” Moody’s said in its report, “U.S. Not-For-Profit Healthcare Outlook Remains Negative for 2012.”
Health care providers that opt for traditional fixed-rate debt issuance will benefit from reduced exposure to banks and potential liquidity draws, which are credit positives, analysts said.
Many hospitals with variable-rate debt successfully renewed standby bond purchase agreements and letters of credit in 2011, and many new agreements feature improved covenants and staggered expiration dates, Moody’s said.
Direct placements with banks — which saw a 475% increase last year from 2010 — will continue to rise as issuers look for alternatives to traditional variable-rate debt, the rating agencies said. Analysts warned that the loans, usually unrated, often carry many of the same risks as letters of credit, and that providers need to be liquid enough to make accelerated payments if triggered.
This year could also determine the future of the new federal health care law, scheduled to take effect in 2014.
The Supreme Court is expected to rule mid-year on states’ challenge to the law, and the November elections could hand power to candidates who have vowed to repeal the new law.
Whatever the outcome, the sector will likely experience major reforms, driven by employers unwilling to continue to pay rising costs, according to Arrick.
“If the law ends up getting overturned, you’ll see health care reform under a different guise move forward,” he said. “Everything will move down the reform path.”