A month after Fitch Ratings downgraded Lexington Medical Center by six notches, the agency agreed to the hospital’s request to withdraw the rating.
Fitch had recently changed its methodology for evaluating pension risk, and cited the South Carolina hospital’s high pension liability in its July 2018 downgrade to BB+. Lexington Medical Center’s finance chief disagreed with Fitch’s rationale, and said his team no longer believed the agency could accurately rate the hospital.
“Consequently, we requested that Fitch withdraw its rating,” Chief Financial Officer Jeff Brillhart said in a statement. “Standard & Poor’s did not use that same methodology.”
In going from being triple rated to double rated, Lexington Medical Center took a calculated risk in a municipal market that’s become increasingly hospitable to borrowers with fewer ratings. Consequently, more and more issuers—both inside and outside the healthcare space—are taking bonds to market with fewer ratings and asking Fitch, S&P Global Ratings or Moody’s Investors Service to drop existing ratings.
The numbers paint a dramatic shift. In 2012, 43% of issuances came to market with three ratings, according to an analysis by Municipal Market Analytics. By 2021, that had fallen below 25%. During the same period, issuances with zero, one and two ratings increased.
All three rating agencies declined to discuss the subject on the record.
It’s not always because the companies don’t like the rating, either. Maintaining a bond rating is expensive and time consuming, and some finance experts say it’s worth running the numbers on whether the borrowing savings offset those expenses.
“Health systems are thinking more about the value of each rating and the cost and effort of each rating,” said Liz Sweeney, president of public finance consultancy Nutshell Associates. “I think the market has become more accepting of fewer ratings.”
‘You don’t need three’
Sweeney, a former S&P analyst, faced such a decision firsthand in her capacity as a board member at the University of Maryland Medical System.
The Baltimore academic health system had three ratings at the time in 2020, but was weighing whether two would be enough. Sweeney explained before an audience at the Healthcare Financial Management Association conference in November that every rating has a financial cost. They require lots of care and feeding of those relationships.
“Would investors care? Would it raise our cost of capital?” she said. “In talking with financial advisers, we determined two ratings was sufficient for us, so we did drop one.”
The most benefit comes from the first rating, with each additional rating providing less incremental benefit, Sweeney said in an interview. She declined to elaborate on UMMS’ request that Fitch withdraw its rating—which the agency did in 2021—and UMMS declined to comment.
Finance experts recommend health systems assess the value of their ratings and how the cost of the rating compares with the improvement it brings to their cost of capital.
Getting and maintaining a bond rated takes time and money. There are presentations, responding to information requests, building trust with the ratings analyst and maintaining an ongoing dialogue. Each agency has a different approach to ratings, so there’s a need to learn their unique styles.