As bond investors continue to push for more hospital financial data, credit-rating agencies are exploring ways to feed the demand for timely analysis.
One strategy will be rolled out early this year, when Standard & Poor's introduces a service in which it will publish quarterly reports on a hospital issuer in exchange for an annual fee paid by the issuer.
Normally, Standard & Poor's issues reports on a particular credit every one to three years, unless there is a rating change.
Investors have begun to demand more frequent information about hospital bonds in the wake of the Allegheny Health, Education and Research Foundation bankruptcy and other major downturns. The National Federation of Municipal Analysts last year recommended quarterly financial reporting in its best practices for hospital disclosure (Aug. 21, 2000, p. 44).
In response, most hospital issuers have begun to release quarterly financial reports.
New York-based Standard & Poor's, which is one of the top two healthcare credit-raters, says supplementing hospitals' own quarterly financial disclosures with analyses by an independent third party will enhance demand for the facilities' bonds.
"Part of the reason hospital bonds are trading at a premium to other sectors is that the institutional investors doing the buying are nervous about the liquidity," says Martin Arrick, a director in public finance at Standard & Poor's. "There are a lot of stories of hospital bonds coming up for trade and there are no buyers."
Arrick says the quarterly reviews will be less intensive than reports for new issues or potential rating changes, which involve face-to-face meetings with multiple hospital executives and site visits. "We want something less onerous to the client, probably a conference call on the phone with the chief financial officer," he says.
The service, called Disclosure Plus, is aimed primarily at large systems that frequent the bond market. Other potential markets, according to the company, are hospitals with variable-rate debt and smaller hospitals and systems whose credits are not followed closely by major institutional investors.
Standard & Poor's declined to say how much it will charge, but Arrick says the annual fee for the service will be "modest." The firm tracks about 500 hospital credits.
One of its first customers will be St. Louis-based Ascension Health, which has $770 million of outstanding variable-rate debt. The system could save $385,000 annually if the quarterly credit reports help to lower its interest rates by five basis points, Ascension CFO Jerry Widman says.
Normally, issuers pay a one-time fee when they issue bonds for which rating agencies agree to monitor the credit over the life of the bonds. Gordon Howie, an investment banker with PaineWebber in San Francisco, says he believes it's reasonable for a rating agency to charge for extra reporting. Credit-raters have been working harder because of volatility that has led to massive downgrading of hospitals.
"I think it makes sense for (the rating agencies) from a business point of view to better match activity with revenue," Howie says.
Competitors Moody's Investors Service and Fitch say they do not plan to introduce a similar service. However, both are taking other steps to meet investor demand for more analysis.
For example, Moody's began an initiative last summer to publish ratings affirmations on all of its hospital credits at least once a year, says Moody's analyst Dennis Ferrell.
Fitch plans this year to start quarterly reporting on about a dozen frequently traded credits.
"I think one criticism from investors and other industry participants is that the rating agencies react a little bit slowly," says Fitch analyst Jordan Melick.
But Fitch, the No. 3 agency after Standard & Poor's and Moody's, will not charge fees to those organizations for which it decides to issue quarterly reports, Melick says. Although rating agencies are issuing more updates and reports because of the volatile market, that heightened activity could be offset by other years when the market is booming and healthcare credits require less oversight, he says.
As of two years ago, Fitch began charging surveillance fees to some hospital issuers that have "unusually complicated" structures, such as hospital systems integrated with large HMOs, for which it charges an extra one-time fee of about $5,000, he says.
Kit Taylor, executive director of the Municipal Securities Rulemaking Board, which sets standards for municipal securities dealers, says a move by rating agencies toward quarterly analysis would help dealers fulfill their obligations to assess the risk of their products and price them fairly.
Hospitals could get a checkup on their disclosure efforts this month, when the board holds its second forum on disclosure issues in Washington. The first was in November 1998.
"Following that conference a lot of effort was made by the industry, including us, to improve disclosure. We'll see how it's working out," Taylor says.
To set the stage, the board last month issued a discussion paper in which it advocates creating a free, Web-based index of disclosure documents, among other steps to improve investor access. The paper is available on the board's Web site, www.msrb.org.