H2C INDUSTRY INSIGHTS: CAPITAL MARKETS

Credit Ratings and Actions

Week of August 8, 2022

Credit Ratings & Actions: Healthcare

July NFP Healthcare Rating Actions

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  • Except for CT-based Nuvance Health, a $2.4 billion system, all upgrade and downgrade activity for the month of July affected health systems and hospitals with under $1.0 billion in total operating revenue.  

  • Operating performance, both positive and negative, continued to drive credit  activity direction this month. This trend follows recent commentary from all three rating agencies that they’re closely following management teams’ ability to steer  an organizational rebound from COVID-19 and a historically tough Q1 2022. 

July NFP Healthcare Upgrades/Downgrades

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Rating Agency Commentary on NFP Healthcare Sector

  • S&P noted in their U.S. Public Finance Mid-Year Outlook that it is closely monitoring NFP healthcare commercial payor negotiations to “understand what relief there might be for providers to manage higher expenses” (2), S&P also noted that providers are continuing to explore M&A to help “accelerate strategic investments and manage operating stress” (2), despite a toughening regulatory environment.

  • Fitch noted NFP hospital margins are expected to continue to erode from ongoing inflationary pressures, affecting labor, supply and capital costs. Fitch mentions improvement in operating margins will require hospitals to “make transformational changes to the business model (long term), while managing cost pressures through a combination of rate hikes (short term) and relentless, on-going cost-cutting and productivity improvements (medium term)” (3).

Credit Spreads – 30Y Hospital Indices (4)  • (bps)

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Source: Moody’s Investor Service, S&P Global Ratings, and Fitch Ratings.

(1) Current Moody’s/S&P/Fitch ratings, reflecting indicated July rating actions.

(2) S&P “U.S. Public Finance Mid-Year Outlook: The Heat Is On” dated July 14, 2022.

(3) Fitch “Inflation to Erode Not-for-Profit Hospital Margins Absent Major Changes” dated July 19, 2022.

(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 August 5th.

Credit Ratings & Actions: Higher Education

July Higher Education Rating Actions

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  • Upgrades this month resulted from strong operating performance and significant state appropriations. The sole downgrade this month is also “under review for downgrade” with management declaring a financial emergency.

  • Currently, 80% of S&P rating outlooks on private colleges and universities are stable, 16% are negative, and 4% are positive. This represents an improvement in credit quality from the previous year, when 30% of outlooks were negative and only 1% were positive. 

July Higher Education Upgrades/Downgrades

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Rating Agency Commentary on Higher Education Sector 

Credit Spreads – 30Y Higher Education Indices (5)  • (bps)

  • S&P released its Fiscal 2021 Median Ratios for both U.S. Public and Private Colleges and Universities. Public colleges and universities experienced a median enrollment decline of 1.5%, however these institutions generated a median operating surplus of 3.7%. Private colleges and universities experienced a 2.7% decrease in median FTE enrollment and a 1.8% increase in median net operating income (2)(3).

  • Fitch released its Fiscal 2021 Median Ratios for U.S. Colleges and Universities. Median ratings were unchanged at ‘AA’ for public institutions, and at ‘A-’ for private institutions. Rating upgrades and downgrades were generally balanced in 2021, with five downgrades and four upgrades in the sector. Despite operating pressures, Fitch notes universities successfully responded with “corollary reductions in operating and capital expenses” (4).

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Source: Moody’s, S&P, and Fitch.

(1) Current Moody’s/S&P/Fitch ratings, reflecting indicated July rating actions.

(2 )S&P “U.S. NFP Private College And University Fiscal 2021 Median Ratios: Financial Margins Improve, Balance Sheets Strengthen Despite Enrollment Declines” dated July 12, 2022.

(3) S&P: “U.S. NFP Public College And University Fiscal 2021 Median Ratios: Federal and State Funds Relieve Pandemic Pressure, Elevate Margins” dated July 12, 2022.

(4) Fitch “Fiscal 2021 Median Ratios for U.S. Colleges and Universities” dated July 11, 2022.

(5) 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 August 5, 2022.

About H2C Securities Inc. ("H2C")

H2C is a strategic advisory and investment banking firm committed to providing superior advice to healthcare organizations, higher education institutions, and related companies throughout the United States. H2C’s professionals have a long track record of success in healthcare and higher education mergers and acquisitions, capital markets, and real estate transactions, acting as lead advisors on hundreds of transactions representing billions of dollars in value.

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