CHICAGO - While the market has strengthened for many issuers over the last month, nonprofit health care providers continue to struggle to sell bonds at attractive prices - a problem that is likely to persist throughout 2009, Standard & Poor's predicted in a grim report on the sector issued yesterday.
Difficulty in accessing capital in the bond market is just one of many problems facing U.S. nonprofit health care providers in 2009. The national recession, weak investment market, and state budget crunches are all likely to aggravate existing negative trends, Standard & Poor's warned in "Recession Amplifies Negative Outlook for Not-For-Profit Health Care Sector." The rating agency will hold a teleconference call on the report today.
Like Moody's Investors Service and Fitch Ratings, Standard & Poor's maintains a negative outlook on the sector.
While large, highly rated providers will fare better than smaller providers, both are continuing to suffer from weak operating trends such as slowing growth and revenue declines. Pressure will likely increase as states struggle to overcome deficits, possibly by tightening Medicaid rates and eligibility, an important revenue source for health care providers.
Analysts said they expect downgrades will "substantially" exceed upgrades in 2009 in addition to more outlook revisions to negative.
Providers face more problems than just difficulty in obtaining capital amid sluggish investor interest. Health care issuers continue to suffer from a number of disruptions in the bond market last year, including the collapse of the auction-rate market and the rising cost of credit enhancement following downgrades of bond insurers, analysts said.
"In our opinion, many providers need to tap the credit market in 2009, but two big questions are: Will there be enough buyers, and how far down the credit spectrum will they be willing to go?" the report said.
Triple-B rated issuers are having a particularly difficult time in getting deals done, according to Standard & Poor's analysts. "These borrowers are finding a very limited market for fixed-rate debt and have seen their traditional avenues to credit enhancement - bond insurance and letters of credit - essentially closed to them over the past 18 months," the report said.
The effects of last year's collapse of the auction-rate debt market - a type of debt long favored by the health care sector - continues to affect issuers, analysts said. Most providers moved quickly to refinance their failed auction-rate debt into variable-rate debt with costly credit enhancements or internal liquidity, or with higher-interest fixed-rate debt, which was also sometimes supported with internal liquidity.
"While these strategies allowed providers to eliminate their auction-rate debt, which in many cases had become very expensive, the new structures were either more expensive than providers' historic cost of capital or, to the extent variable-rate debt was utilized, providers were increasing renewal risk in their financial profile," said the report.
The sector has undergone something of a shift toward shorter-term obligations - especially in the case of bank bonds, where banks purchased the bonds when remarketings failed. Shorter-term debt, especially when coupled with increasingly strict collateral posting requirements for swaps, can all act as drains on a provider's liquidity, possibly triggering a rating change, analysts warned.
On the bright side, as providers continue to postpone deals hoping for a stronger market, they could benefit from lighter debt levels over the near-term, the report said.
