Bank downgrade, borrower uncertainty

The risk that banks represent to healthcare borrowers since the credit crisis is by now familiar. Hospitals that enter debt markets with bank credit backing can find investors wary or uninterested when banks' own credit strength falters. That can drive up interest rates or force borrowers to rapidly buy back or refinance debt.

So it should come as no surprise that the downgrade of 15 banks by Moody's Investors Service last week would create uncertainty for some healthcare borrowers. Moody's included Bank of America, Citibank, Morgan Stanley Bank and the Royal Bank of Scotland on the list and dropped the banks' short-term credit rating to P2 from P1.

Borrowers with bonds backed by the downgraded banks—which typically trade in short-term markets as often as daily or weekly—may see less appetite from investors, said Pierre Bogacz, a managing director with HFA Partners, a healthcare capital consulting firm. He said he believed the disruption from the bank downgrades will likely further erode borrowers' willingness to use bank-backed bonds. “The market sentiment is pretty much gone,” he said. Many hospitals and health systems have already moved to less-risky sources of capital, he said.

Moody's Investors Service released a list of bonds, including some healthcare debt, downgraded because they were backed by dedicated support from the downgraded banks.

Separately, Moody's reviewed another 500 borrowers with debt backed by banks that their short-term ratings downgraded. Less than 5% of borrowers could see long-term credit ratings affected, most likely those with high exposure to risky debt and a smaller cash cushion, Moody's said. “These issuers would have fewer resources to manage through a market disruption,” the ratings agency said.

You can follow Melanie Evans on Twitter: @MHmevans.