Blog: More consolidation, better hospital credit (for now)
One major credit rating agency upgraded more not-for-profit hospitals and systems than it downgraded between July and September, and deals—mergers, acquisitions and leases—were behind better credit in several cases.
Moody's upgraded 12 not-for-profit healthcare borrowers with $3.2 billion in outstanding debt last quarter compared with the seven downgraded borrowers with $957.3 million of debt, Moody's said in a new report.
Indeed, deals have been so numerous and have so influenced credit that Moody's Investors Service now says it was wrong earlier this year when it said that 2012 would likely close with more downgrades than upgrades. The year may end with an equal number of each, the report said. “We're not prognosticators here,” said Moody's associate analyst Carrie Sheffield. “We do have a negative outlook for the sector” and analysts expected to see more downgrades than upgrades, she said.
Don't think, however, that Moody's is any more optimistic about the hospital sector. The outlook remains negative, the report said, for the very reasons hospitals are consolidating: the drag on revenue from the economy, struggling states and the federal deficit.
And even if the same number of borrowers see credit go up as go down this year, Moody's said the dollar amount of debt downgraded for the year is expected to exceed the value of upgraded debt. That's because of the recent downgrades to Dignity Health and Catholic Health Initiatives as the systems announced they would return to the markets for capital this month.
Dignity Health said it would borrow up to $500 million and CHI is expected to borrow $1.5 billion.
Moody's placed three borrowers under review for possible credit changes last quarter, among them West Penn Allegheny Health System, which has $737 million in debt. The Pittsburgh health system's weak Caa1 credit is at risk for a downgrade after officials said they called off a deal to be acquired by Highmark.
So who got an upgrade out of a deal last quarter?
Credit ratings climbed for the Poudre Valley Health Care (A1 from A2) and the University of Colorado Hospital (A1 from A3) thanks to their joint operating agreement.
Alexian Brothers Health System went to A2 from A3 after its acquisition by Ascension Health Alliance.
Richardson Hospital Authority sold its hospital to Methodist Health System and saw its credit increase to A1 from Baa2. And cash from leases with Memorial Hermann Hospital System helped to boost the rating of the Northeast Hospital Authority to A2 from A3.
Not every deal leads to better credit. Acquirers could see a rating drop as they absorb distressed assets, as was the case last quarter with one deal that led to an upgrade and a downgrade. Moody's upgraded Saints Memorial Medical Center to Baa2 from Caa1 after it was acquired by Lowell General Hospital, but analysts lowered Lowell General's rating to Baa2 from Baa1 because of Saints Memorial's weak operations and additional debt.
Mergers and acquisitions may also continue to affect credit ratings well after a deal has closed, said Lisa Martin, a Moody's senior vice president.
The combined operations may be more efficient or enjoy greater leverage with vendors and insurers, which could benefit ratings. But credit ratings may suffer if mergers or acquisitions result in culture clashes that distract management or prompt physicians to send patients elsewhere, she said.
You can follow Melanie Evans on Twitter: @MHmevans.