H2C INDUSTRY INSIGHTS: CAPITAL MARKETS
Credit Ratings and Actions
Week of March 13, 2023
Credit Ratings & Actions: Healthcare
February NFP Healthcare Rating Actions (1)
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Mercyhealth (IL) was upgraded by Fitch due to a strengthened financial profile, particularly from ability to increase unrestricted reserves while internally funding a new hospital.
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UC Health (OH) received a two-notch downgrade from both Moody’s and S&P a result of shrinking liquidity and operating losses that put it at risk of violating its debt service coverage covenant.
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Geisinger Health (PA) was downgraded by Fitch as a consequence of negative cashflows caused by industry headwinds, particularly increased labor and supply costs.
February NFP Healthcare Upgrades/Downgrades
Rating Agency Commentary on NFP Healthcare Sector
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Moody’s reported that a federal Third Circuit Court of Appeals passed a ruling in favor of drug manufactures and health insurers, allowing them to limit the sale of 340B drugs to “contract pharmacies”. The ruling has come after years of significant disapproval of the 340B program, in which critics say hospitals and contract pharmacies are purchasing drugs at a discounted rates while charging still insurance companies and self-payors regular prices. Moody’s views the ruling as a credit negative for safety-net hospitals who are more likely to utilize contract pharmacies (1).
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S&P released its 2022 Year-End Review for NFP Health Care. Of all ratings actions, 83% were maintained, 9% were downgrades, 6% were upgrades, and 2% were new ratings. Stand-alone providers represented 70% of all negative rating actions while systems represented just 27%, which “reflects the greater diversity and cushion systems have that allowed for better shielding from pandemic effects (2).
Credit Spreads – 30Y Hospital Indices (4) • (bps)
Source: Moody’s Investor Service, S&P Global Ratings, and Fitch Ratings.
(1) Current Moody’s/S&P/Fitch ratings, reflecting indicated February rating actions.
(2) “Court allows limits on use of contract pharmacies, a credit negative for hospitals”; Moody’s report dated February 3, 2023
(3) “U.S. Not-For-Profit Acute Health Care Rating Actions, 2022 Year-End Review”; S&P reported dated February 28, 2023
(4) US NFP Hospital indices spread to AAA GO benchmark. Bloomberg BVAL indices. BVAL indices based on recent primary and secondary market trades and reflect impact of periods of market volatility and limited trading activity. Data as of March 10th.
Credit Ratings & Actions: Higher Education
February Higher Education Rating Actions (1)
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Jacksonville State University (AL) was downgraded by Moody’s and S&P due to its increased leverage resulting from a lease-structured $125 million debt issuance. JSU’s foundation issued the debt, and the University will lease the new Project from the Foundation with lease payments sufficient to cover debt service on the new Series 2023-A and 2023-B Bonds.
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Long Island University (NY) was upgraded by S&P due to “exceptional operating margins resulting from good management of expenses during the past several years” in addition to a relatively light debt and a “below-average tuition discount rate”
February Higher Education Upgrades/Downgrades
Rating Agency Commentary on Higher Education Sector (2)
Credit Spreads – 30Y Higher Education Indices (3) • (bps)
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S&P reports that the unprecedented federal emergency relief funds received during the COVID-19 pandemic have mostly been used by 2023, and that the lack of new funds will likely result in operating pressure for many higher education institutions.
– S&P expects there to be an increased divergence of rating actions between “highly selective institutions with significant financial flexibility” and “non-selective institutions with weak balance sheets. S&P reports that smaller and lesser-known institutions are finding it more difficult to draw in prospective students.
– S&P expects there to be an increased number of school closures over the next several years, but that “struggling institutions with valuable real estate, brand, or institutional core competencies will likely have an easier time securing an affiliation or merger”. S&P has also seen an increased number of schools looking at asset monetization opportunities to supplement short term liquidity.
Source: Moody’s, S&P, and Fitch.
(1) Current Moody’s/S&P/Fitch ratings, reflecting indicated February rating actions.
(2) S&P’s “Outlook For Global Not-For-Profit Higher Education” dated January 18, 2023
(3) US Higher Education indices spread to AAA GO benchmark. BVAL indices based on recent primary and secondary market trades and reflect impact of periods of market volatility and limited trading activity. Data as of March 10th , 2023.
Key Rates
Source: U.S. Department of the Treasury, Bond Buyer, Investment Company Institute, Bloomberg and Refinitiv/TM3. Data as of March 10, 2023.
(1) Weekly SIFMA and SIFMA/1M-LIBOR rates as of March 8, 2023.
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H2C Capital Markets Team