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U.S. Not-For Profit Senior Living Sector's Resilient And Decisive Management Gave Ratings Stability In 2020

The fiscal 2020 medians for continuing care retirement communities (CCRCs) with debt rated by S&P Global Ratings revealed the varying levels of success and challenges the sector experienced during the pandemic, with results largely depending on the rating category. However, it appears that the pandemic's initial phases had minimal influence on overall credit quality, as evidenced by the lack of rating or outlook movement among our rated portfolio as of Sept. 30, 2021. S&P Global Ratings rates the debt of 21 not-for-profit senior living obligors, including two confidential ratings.

For information about the sector in 2019, please see our report "U.S. Not-For-Profit Senior Living Sector Showed Pre-Pandemic Stability in 2019 But Rating Pressures Loom", published Oct. 29, 2020, on RatingsDirect.

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Generally, the following observations can be made regardless of rating category:

  • Operations: losses increased as the gap in margins widened between rating categories;
  • Adjusted maximum annual debt service (MADS): coverage was steady and remained reliant on non-operating income;
  • Key liquidity metrics: remained steady and in line with prior-year levels, broadly speaking;
  • Occupancy: independent living unit (ILU) and assisted living unit (ALU) demand was relatively stable while skilled nursing facility (SNF) demand softened;
  • Key industry factors: Aging demographic, continued shift in care models, and growing workforce shortages driving credit trends;
  • Rating actions: No rating or outlook changes--we affirmed 21 ratings;
  • ESG risk factors: environment risks vary depending on location, social risks were heightened due to the pandemic, and governance risks were neutral; and
  • Pension risk: only five rated credits maintain a defined benefit pension plan with funding levels that range from more than 100% to just less than 50% of the total liability.

2020: An Absence Of Rating Actions and Outlook Changes

Following 2019, when rating actions remained infrequent but favorable, credits remained solidly stable in fiscal 2020 with no rating or outlook changes since Oct. 29, 2020, when we published our 2020 report on the senior living sector portfolio. For details on what is supporting each rating and outlook, please see our issue-specific reports on each obligor.

Chart 1

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Chart 2

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What We're Watching

Management's response to COVID-19 pandemic has been swift, prudent, and comprehensive

U.S. not-for-profit CCRC organizations rated by S&P Global Ratings have exhibited overall resiliency in the face of the pandemic in large part due to management teams reacting quickly to limit the number of positive COVID-19 cases among both staff and residents and minimize potential widespread outbreaks on campus. We believe that the health care and retirement industry has learned a significant amount about how to manage operations within this new environment. Elevated protocols commonly enacted by providers include temporarily closing common areas such as dining rooms and pivoting to in-unit meal service, amending visitation protocols, routinely testing residents and staff, enacting contact tracing programs, stockpiling personal protective equipment, and inoculating both residents and staff. Longer term strategies often included investing in SNF upgrades to offer a greater number of private rooms. The importance of strong management teams who can provide the necessary leadership to effectively mitigate many post pandemic-related and other near-term operational risks remains an important component in our analysis of our rated portfolio.

Retention and recruitment for staffing remains a key workforce challenge and expense driver for entities rated by S&P Global Ratings and affects not only the senior living community but the broader health care industry overall. The pandemic has only exacerbated this challenge. While inoculation levels among staff continues to change, management teams have largely reported that among the overall staff, vaccination rates are relatively high but are often at a much lower level than resident vaccination rates. While overall staff inoculation levels may increase even further as vaccine mandates are enforced, the mandates have the potential to exacerbate workforce shortages and management teams will need to carefully weigh and navigate those risks, reflecting an industry-wide challenge for providers in general. The long-term pressure of a tight labor market and employee burnout remains an open, but critical question for both CCRCs and the broader healthcare industry.

Financially, rated providers have had varying levels of success in weathering the pandemic

Operating losses on a percentage basis nearly doubled in fiscal 2020 to negative 2.5% for medium- to high investment grade (A/AA) credits, while the median operating margin declined by 13x to negative 7.0% for low investment grade (BBB) credits. Further, the gap in operating margins between the two rating levels widened to 4.5% in 2020 from less than 1.0% in 2019. This widening gap is mostly driven by the much greater losses displayed by lower investment grade credits and is reflective of the categories' weaker credit quality, which often incorporates risk factors representative of greater financial instability. Operating margins for CCRCs can often be negative, given the nature of the business model. For that reason, S&P Global Ratings evaluates both revenue-only MADS coverage and adjusted coverage, which includes net entrance fees and deposits.

Excess margins on a percentage basis weakened but remained solidly positive for medium to high investment grade credits, while excess margins turned negative for low investment grade credits. The considerable investment market volatility experienced at the onset of the pandemic may have contributed to this. Notably, the gap in excess margins between the rating levels described above remained stable in 2020 compared to 2019. Excess margins and coverage remain reliant on non-operating income, particularly income from investment markets. While we recognize the benefits of non-operating income, we continue to view a high dependence on this source of cash flow as a credit risk given that it can be inconsistent and subject to various external factors. Thus, we believe operating results excluding investment income will always be a key credit factor.

Key liquidity and financial flexibility metrics such as days' cash on hand (DCOH) and unrestricted reserves to long-term debt increased for the 'A' and 'AA' rated issues but decreased or remained flat, respectively, for 'BBB' rated credits widening the gap between the two rating levels for both metrics and further delineating the difference in overall credit quality between the two categories of rated obligors. This could be a function of different levels of capital spending between the two rating levels, which also contributed to a widening gap in average age of net fixed assets.

We note that the CCRCs rated by S&P Global Ratings did not request or receive Medicare advance payments (with one exception), but many did request and receive grants from the Paycheck Protection Program (PPP), which have in some cases already been forgiven. While provider relief funds under the CARES Act varied by provider, the amount of these funds was generally immaterial to operating margins, although we recognize that this funding helped prevent even greater losses due to the pandemic. As applicable in 2020, and consistent with S&P Global Ratings practice, Medicare advance payments and other short-term borrowings such as PPP loans are excluded from unrestricted reserves, contingent liabilities, and long-term debt. Recognized CARES Act provider relief funds are included in operating revenue, with unrecognized grants available to organizations as they entered their fiscal 2021 year.

Defined-benefit pension plans are uncommon among the senior living organizations rated by S&P Global Ratings. For those five credits that do maintain a defined-benefit pension plan, we evaluate how it may contribute to credit risk by assessing not only the funded status of the plan on a percentage basis, but also consider the nominal amount of the unfunded liability, the discount rate used by the plan, whether the plan is frozen, and broader funding and derisking strategies. Considered together, these factors help us assess the likelihood of future financial obligations pressuring the rating and if so, the extent that pension risk weighs on an issuer's overall financial profile.

Demand for independent living units quickly rebounds in post-pandemic environment

Demand for ILUs and ALUs in fiscal 2020 and during the initial phases of the pandemic appears stable with ILU occupancy only modestly softening compared to fiscal 2019. This could be driven partly by many seniors and their families perceiving the relative safety and community of a quarantined campus facility as preferable to living independently in isolation to provide protection from the pandemic. In addition, it is possible that potential residents have sought to monetize their real estate assets in a solid market. However, we will be watching to assess how proposed tax reform, particularly in the form of higher capital gains tax rates, may dampen interest in real estate investments and could lead to a less favorable market for seniors seeking to sell their homes and move into a CCRC. We will also be watching to determine if and how ILU and ALU demand evolves in a post-pandemic operating environment--we note that broadly speaking, management teams have learned how to move campus tours online, waiting lists reportedly remain solid, and awareness of the relative safety of an actively managed campus has matured.

The overall occupancy decline for SNF in 2020 was due to the suspension by hospitals of non-emergent procedures in spring 2020, combined with the suspension by CCRC management teams of direct admissions from outside the community. Given that we have generally seen a solid rebound in hospital surgical demand after the suspension of non-emergent procedures in spring 2020, and management teams are learning how to better manage COVID-19 surges, we will be watching to see if SNF occupancy rebounds and normalizes as expected in a post-pandemic environment.

As fluctuations in ALU and SNF occupancy depend on the timing of transitions by residents from one level of care to another, we typically view short-term variances as routine and focus more on longer-term trends. We also recognize developing trends in how CCRCs manage occupancy, due in part to the growing trend of aging in place and the influence of technology on the delivery of care, a strategy which has become more robust and accepted during the pandemic and which we believe has contributed in part to the steady, albeit modest, decline in overall ILU and ALU occupancy of rated entities. To address this challenge, some providers collaborate with aging in place services to support new residents as they move into the ILU or allow those already in ILUs to remain in place for a longer period before moving to an ALU. In some cases, ILU and ALU occupancy is combined and categorized as "residential care" as many residents who may need assisted living services can remain in an ILU and still receive an increased amount of care characteristic of ALU services. From a credit risk perspective, we look to the underlying trend of all services provided and how the delivery of those services influences financial performance.

Chart 3

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Managers seek to address competition for residents and staff via capital investments and improving worker morale

Competition exists to varying degrees depending on the market for both residents and employees. For residential demand, competition can be meaningful in some areas, but it is not present in all markets, particularly for full service CCRCs. Capital investments in facilities to maintain and improve curbside appeal, expand amenities, and flexible contract types are strategies used by management teams to remain competitive. However, as expected, the onset of the pandemic brought about a significant pullback in capital investing, resulting in average age of plant increasing to more than 14 years for the first time in recent memory for issuers in the medium to high investment grade ratings (A/AA) while low investment grade (BBB) issuers remained more stable, even modestly lowering the median average age of plant, thereby doubling the gap between the two rating levels to nearly three years in 2020 from nearly 1.5 years in 2019.

Most issuers have been able to balance ongoing capital spending needs, necessitated by curbside appeal considerations and competition, with stability in unrestricted reserves. This achievement is often aided by sound overall demand, solid investment market returns, and many providers taking advantage of attractive borrowing rates to finance larger capital projects, all of which support annual cash flow. We expect average age of plant to steadily improve, particularly for the higher-rated issuers, and then stabilize over the medium to longer term, driven in part by the need for ongoing capital investments to remain competitive, or to accommodate demand with new units. We will be watching capital investing in the post-pandemic environment to assess how well management teams balance capital investments with liquidity and financial flexibility.

For staffing needs, management teams report that a key strategy for recruiting and retention of staff in a tight labor market with workforce shortages, aside from higher wages, is keeping morale high through various non-monetary benefits, engaging employee programs, propagating and growing close and positive relationships between staff and residents, and keeping staff to resident ratios to a minimum. In some cases, when nearby less successful senior living communities close, spin off business lines, or furlough staff, it can be to the benefit of more financially stable long-term care organizations in the area who can leverage the recruiting opportunity. In addition, most CCRCs do not have a meaningful organized labor component, which we view favorably due in part to the potential higher wage and benefit structure, as well as increased risk of challenging labor negotiations. We will be watching how workforce challenges influence both a CCRC's financial profile and ability to provide quality care to residents.

Strategic affiliations, consolidations remains limited throughout the sector

The competition for residents and staff is somewhat offset by underlying economic fundamentals, which remain favorable as most credits within our portfolio operate in areas with solid to robust demographics. We consider the growing ranks of senior citizens a long-term positive credit factor for the sector (the U.S. Census Bureau projects about 73 million adults will be 65 years of age or older by 2030, compared to about 56 million today with nearly one in four Americans projected to be 65 years of age or older by 2060). We expect the aging population to spur increased competition as new entrants, from CCRCs to single-specialty type providers, look to capitalize on the growing demand. While many of the rated CCRCs in our portfolio are open to affiliations, most management teams proceed cautiously to ensure that an expanded physical footprint does not dilute either the financial profile or broader mission-driven goals and priorities as a cultural alignment between organizations can be critical to effective integration. As a result, merger and acquisition activity remains modest, particularly in comparison to the acute-care hospital sector. Still, some organizations such as Front Porch and Otterbein Homes are two examples of recent merger and acquisition activity in the sector where ratings have been maintained. In the case of Front Porch, it officially affiliated with Covia Communities in April 2021. Otterbein Homes has acquired three senior living communities during the past several years. We view the ability to identify strategic affiliations or acquisitions and successfully execute on them as a positive differentiator among management teams and will be watching to assess how each credit competes in the market to remain viable and financially sound.

Environmental, social, and governance (ESG) risk factors are mostly neutral outside of location

We believe ESG factors are embedded in much of the above. ESG risks vary across credits. From an environmental standpoint, ESG risk is elevated for certain credits such as those on the coast of Florida, an area historically prone to hurricanes of increasing severity. That said, we note that these credits maintain policies and protocols in place such as hurricane shelters and building codes to address these challenges and reduce the potential losses due to severe weather.

We generally view social risk as heightened for CCRCs, which are exposed to elevated risks related to the COVID-19 pandemic and the recent labor shortages, although social risks for any individual credit is typically in line with its sector peers. In our view, the core mission of senior living communities is protecting the health and safety of its residents, which is further evidenced by its responsibilities to provide additional services and care as residents move through the different stages of the continuum.

Broadly speaking, we view governance risk among CCRCs as a neutral credit factor within our credit rating analysis. At the same time, management teams remain a critical factor influencing our view of credit stability. The senior-living providers rated by S&P Global Ratings generally have experienced and well tenured management teams, which exhibited overall resiliency throughout the COVID-19 pandemic and have learned a significant amount during the past 20 months about how to manage operations and address challenges particular to the new environment. Still, we believe ongoing vigilance is required to continue mitigating pandemic-related risks and maintain stable financial performance as occupancy rates, particularly for skilled nursing facilities, rebound from temporarily soft demand.

Portfolio Composition

S&P Global Ratings' senior living sector portfolio is generally split between medium to high investment grade (A/AA) and low investment grade (BBB) credits. As expected, and reflective of the different rating categories, the financial profiles of the higher-rated cohort are typically stronger. In fiscal 2020, many key operating and balance sheet median results highlight the underlying gap in credit quality between the two rating levels, although notably, this gap narrowed in some cases as compared to fiscal 2019 (see Table 3).

The credits remained largely stable in fiscal 2020, extending a long-established trend of overall portfolio stability, with no rating or outlook changes. Two credits had a negative outlook and no credit had a positive outlook. We believe effective and strong management teams among CCRC providers was a significant differentiating factor behind the generally resilient financial performance and rating stability in 2020 and we expect it will support ongoing stability for the overall portfolio with limited rating and outlook movements.

Table 1

U.S. Not-For-Profit Senior Living Sector Ratings List
Obligor State Rating Outlook Primary Contract Type† Last Rated**

Army Retirement Residence Foundation

TX BBB- Negative A July 29, 2021

Carleton Willard Village

MA A- Stable B Jan. 28, 2021

Carol Woods Retirement Community

NC A+ Stable B Jan.15, 2021

Concordia Lutheran Ministries

PA AA- Stable C May 19, 2021

Cross Keys Village/The Brethren Home

PA A- Stable C Sept. 23, 2021

Eskaton Properties

CA BBB Negative Rental Sept. 30, 2020

Foulkeways at Gwynedd

PA BBB Stable A March 30, 2021

Front Porch and Affiliates

CA A- Stable Mostly Rental and A Aug. 11, 2021

Kendal at Ithaca

NY BBB+ Stable A Sept. 1, 2021

Kendal at Oberlin

OH A Stable A June 16, 2020

Loomis Communities

MA BBB Stable Life-care (5%); B (50%); C (45%) Sept. 29, 2020

Masonic Villages of the Grand Lodge of PA

PA A Stable Rental Aug. 20, 2020

Mercy Ridge

MD A Stable C Sept. 8, 2020

Moorings Park Institute

FL A+ Stable A Nov. 23, 2020

Noland Health Services

AL A Stable Rental May 18, 2021

Otterbein Homes

OH A Stable C July 23, 2021

Pickersgill, Inc

MD A Stable C July 16, 2021

Presbyterian Retirement Village of Rapid City (Westhills)

SD A+ Stable A May 13, 2021

Shell Point

FL BBB+ Stable A July 21, 2021
*Ratings and outlooks as of Sept. 30, 2021. †For definitions and explanations of the contract types, see our Senior-Living Criteria. **The "Last Rated" column indicates the most recently published rating release and report. Any subsequent credit events and related analysis will be captured in future rationales and media releases.
Ratio analysis

We view ratio analysis as an important tool in our assessment of the credit quality of not-for-profit senior-living providers, although it is only one of several factors that we consider when assigning our ratings. While ratios offer a snapshot of the financial position of our rated CCRCs and help in the comparison of credits across rating categories, as important and rounding out our analysis of an entity's overall credit profile, we consider demand, market position, and demographic trends, contract types, competitive landscape, and management teams. In addition, we believe tracking median ratios over time allows for a clearer understanding of industrywide trends and provides a tool to better assess the sector's future credit quality. Because of the intertwining of mission and operations among all members of an organization, the financial statements we generally use for the medians and our analyses are for systemwide results, which include results for obligated and non-obligated group members. Additionally, the smaller size of this cohort may skew the numbers, so individual credit analysis remains critical.

Table 2

U.S. Not-For-Profit Senior Living Sector: Overall Medians
2020 2019 2018 2017 2016 2015
Sample size* 21 22 26 28 28 28
Total operating revenues ($000) 33,923 33,469 33,756 36,586 36,709 35,609
Operating margin (%) (3.8) (0.9) (0.5) (0.6) 2.0 0.4
Excess margin (%) 2.5 4.6 7.4 5.3 3.4 5.9
Operating ratio (%) 96.8 92.6 92.3 91.8 92.2 91.7
MADS coverage (x) 1.0 1.2 1.4 1.4 1.1 1.3
Adjusted MADS coverage** (x) 2.5 2.7 2.7 3.0 2.4 2.5
Debt burden (%) 10.4 9.8 9.7 9.7 10.3 10.7
Deferred revenue 52,343 51,638 52,990 48,648 42,092 39,111
Days' cash on hand 745.1 750.9 665.3 661.0 614.0 642.5
Long-term debt/capitalization (%) 49.3 50.3 55.2 53.9 55.6 56.7
Adjusted long-term liabilities /capitalization** (%) 26.3 26.9 30.7 33.3 34.9 38.6
Cushion ratio 17.6 17.1 15.6 14.5 13.3 12.2
Unrestricted reserves/long-term debt (%) 179.8 179.2 128.4 138.6 131.5 108.5
Average age net fixed assets (years) 13.8 13.1 12.8 13.2 12.3 12.1
MADS--Maximum annual debt service. *Includes two confidential ratings. **Includes net entrance fees and deposits.

Table 3

U.S. Not-For-Profit Senior Living Sector: Medians By Rating Level (2020 vs 2019)
--2020-- --2019--
AA/A* BBB AA/A* BBB
Sample size† 14 7 15 7
Total operating revenues ($000) 42,081 32,472 48,587 31,987
Operating margin (%) (2.5) (7.0) (1.3) (0.5)
Excess margin (%) 5.5 (0.5) 6.4 0.5
Operating ratio (%) 90.7 97.3 91.2 94.3
MADS coverage (x) 1.6 0.7 1.7 0.6
Adjusted MADS coverage** (x) 2.8 2.4 2.7 2.0
Debt burden (%) 10.4 10.1 9.1 11.2
Deferred revenue 54,695 52,343 54,105 49,171
Days' cash on hand 960.7 344.3 908.4 376
Long-term debt/capitalization (%) 32.9 75.7 37.7 81.1
Adjusted long-term liabilities /capitalization** (%) 25.1 46.4 26.4 46.5
Cushion ratio 21.4 9.00 20.0 8.6
Unrestricted reserves/long-term debt (%) 234.9 64.3 210.3 63.3
Average age net fixed assets (years) 14.53 11.87 13.6 12.2
MADS--Maximum annual debt service. Ratings as of Sept. 30, 2021. †Includes two confidential ratings. *Includes one 'AA' and one 'AA-' credit. **Includes net entrance fees and deposits.

Strong Management Will Remain Integral To Success in 2022

We will continue to watch overall financial performance, occupancy levels, labor pressures, and the various strategies management teams employ to remain competitive--such as capital investment and affiliations. In particular, we will be watching:

  • How workforce challenges influence both a CCRC's financial profile and ability to provide quality care to residents;
  • If and how ILU and ALU demand evolves in a post pandemic environment, including whether SNF demand normalizes, and how technology and evolving care models affect demand of various types of units;
  • How spending on capital investments is balanced with maintaining sufficient liquidity and financial flexibility; and
  • How each credit competes in the market to remain viable and financially sound.

For each of these considerations, we believe that effective management teams will remain key to how successfully CCRC's adjust and adapt to a post pandemic operating environment. Given that ratings and outlooks have remained stable during the past year (as of Sept. 30, 2021), which is notable considering the pandemic, and our view that management's response to the pandemic has been broadly successful, we are optimistic that the CCRC's within S&P Global Ratings' portfolio will continue to effectively address the various challenges facing the sector.

This report does not constitute a rating action.

Primary Credit Analyst:Wendy A Towber, Centennial + 1 (303) 721 4230;
wendy.towber@spglobal.com
Secondary Contacts:Stephen Infranco, New York + 1 (212) 438 2025;
stephen.infranco@spglobal.com
Suzie R Desai, Chicago + 1 (312) 233 7046;
suzie.desai@spglobal.com
Research Contributor:Karan Shah, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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