Rating And Outlook Overview
Covenant violations see uptick in speculative-grade category. Because speculative-grade providers have been affected continually by industry adversity, including elevated labor and inflationary pressures, weakened financial profiles have led to multiple technical covenant violations across the portfolio (some investment-grade issuers have also had to manage technical covenant violations, but speculative-grade providers as a group have been more exposed to greater risks related to violations). Although there have been a range of covenant violations, including debt service coverage and days' cash on hand, at this time waiver or forbearance requests have been granted in each instance, resulting in no events of default. Given that just over 40% of the speculative-grade providers maintain maximum annual debt service coverage below 1x as calculated by S&P Global Ratings, we could see a further uptick in waivers required or potential events of default under legal documents, which we will continue to monitor.
Ratings shift within and into the speculative-grade category. We have seen relative stability in the number of 'BB+' ratings but an increase in all 'B' category ratings. This trend could continue given ongoing expense pressures and larger operating losses with less balance-sheet cushion. Within the 'BBB-' rating category, nearly half of all ratings from 2021 shifted into higher ratings or into speculative grade, keeping the number of 'BB+' ratings at a steady amount of the portfolio. These shifts in speculative-grade issuers can cause variances in the medians.
Outlooks shift negatively given industry pressures. Outlooks on speculative-grade providers have shifted as 47% are negative compared with only 37% in 2022, although percentages could be affected due to the lower sample size. The speculative-grade negative outlooks are more than double the overall portfolio at 22% as rating pressures continue to mount highlighting the elevated level of volatility among these providers. The largest shift was away from stable outlooks, which is currently 47% compared with 57% in 2022. Given the ongoing labor pressures and rising expenses and limited financial profiles, we expect a large portion of negative outlooks will be maintained throughout 2023, although some issuers' ratings could also be revised down.
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Key Median Takeaways
'BB+' rated hospitals' performance highly dependent on provider relief funds. When removing provider relief funds, 'BB+' hospitals had a highly negative adjusted operating margin, which was nearly 1.75x worse than 'BBB-' hospitals' adjusted operating margins; this is a dramatic shift from 2021 when 'BB+' hospitals were closer to breakeven. This shift suggests that while the lower rated hospitals were less reliant on provider relief funds in 2021, there has been material degradation in underlying performance in 2022 as provider relief funds have been fully utilized. Given the operating struggles across the industry, higher rated hospitals are generally better positioned during the recovery period while lower rated hospitals could see a slower rebound.
Financial performance declines sharply. Although there has likely been some shift in the 2022 medians due to declines in the sample size, net patient revenue and total operating revenue have grown robustly, but this was outpaced by expenses as the nearly $5 million operating gain in 2021 has shrunk to a nearly $13.7 million loss in 2022. The expense growth is mainly due to contract labor pressures with usage and rates remaining highly elevated while government and state supplemental funding declined across the portfolio. The subsequent decline in cash flow materially lowered maximum annual debt service coverage, leading to multiple covenant violation waivers and forbearance agreements being granted.
Expense pressures drive weakening of the balance sheet. Speculative-grade medians have shifted to higher unrestricted reserves; however, this is likely due to rating movements within the portfolio composition as opposed to a build-up of reserves given the more limited cash flow seen in 2022. That said, given rising expenses and inflationary pressures, the days' cash on hand metric has meaningfully declined providing less cushion than historical trends. We have also seen limited flexibility with some of this portfolio given reduced cushion under days' cash on hand covenants. Furthermore, cash to debt has declined sharply beyond other median levels and well below 2020 levels given the additional pressures confronting speculative-grade providers. Capital spending has been maintained after a deliberate pullback toward the beginning of the pandemic to help preserve balance sheet metrics during times of uncertainty, but providers may be unable to delay spending over the long term.
Debt-related metrics indicate stability. Speculative-grade debt-related ratios have shown relative stability in leverage, as measured by long-term debt to capitalization as well as the debt burden. Given the higher interest rates, there has been a decline in new issuance volumes, though many providers capitalized on historically low interest rates previously. Like other credits in our portfolio, there has been an improvement in the funded status of pension plans that is mainly due to greatly improving discount rates and management teams focusing on de-risking defined-benefit plans.
Provider relief funds not enough to offset pressures in operating performance. When removing provider relief funds from income in 2022, the speculative-grade adjusted operating margin declined further to negative 5.7% from negative 3.3%, highlighting that while provider relief funds were beneficial, they were not enough to offset operating losses, unlike in 2021. With provider relief funds exhausted and speculative-grade providers having fewer resources to apply for FEMA funds while expense pressures continue to impact the sector, there could be further weakening of operating margins and declines in unrestricted reserves given sustained weakness in cash flow.
Table 1
| U.S. not-for-profit acute health care speculative-grade medians--2022 versus 2021 versus 2020 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Fiscal year | 2022 | 2021 | 2020 | |||||
| Sample size | 32 | 38 | 37 | |||||
| Financial performance | ||||||||
| Net patient revenue ($000s) | 350,115 | 235,057 | 148,489 | |||||
| Total operating revenue ($000s) | 372,578 | 306,951 | 198,368 | |||||
| Total operating expenses ($000s) | 396,086 | 294,094 | MNR | |||||
| Operating income ($000s) | -13,659 | 4,868 | MNR | |||||
| Operating margin (%) | -3.3 | 1.6 | 0.7 | |||||
| Net nonoperating income ($000s) | 2,321 | 3,673 | MNR | |||||
| Excess income ($000s) | -6,581 | 6,596 | MNR | |||||
| Excess margin (%) | -1.1 | 3.5 | 2.4 | |||||
| Operating EBIDA margin (%) | 2.9 | 7.3 | 6.3 | |||||
| EBIDA margin (%) | 4.4 | 9.0 | 7.7 | |||||
| Net available for debt service ($000s) | 11,615 | 18,940 | 15,059 | |||||
| Maximum annual debt service ($000s) | 10,509 | 7,852 | MNR | |||||
| Maximum annual debt service coverage (x) | 1.4 | 2.4 | 2.2 | |||||
| Operating lease-adjusted coverage (x) | 1.2 | 2.1 | 2.0 | |||||
| Liquidity and financial flexibility | ||||||||
| Unrestricted reserves ($000s) | 85,551 | 66,432 | 51,591 | |||||
| Unrestricted days' cash on hand | 76.3 | 115.6 | 112.0 | |||||
| Unrestricted reserves/total long-term debt (%) | 56.9 | 80.9 | 73.4 | |||||
| Unrestricted reserves/contingent liabilities (%)* | 813.1 | 490.4 | 592.4 | |||||
| Average age of plant (years) | 14.0 | 14.2 | 13.9 | |||||
| Capital expenditures/depreciation and amortization (%) | 86.6 | 81.0 | 78.2 | |||||
| Debt and liabilities | ||||||||
| Total long-term debt ($000s) | 126,051 | 96,159 | MNR | |||||
| Long-term debt/capitalization (%) | 54.4 | 47.1 | 54.2 | |||||
| Contingent liabilities ($000s)* | 18,753 | 17,659 | MNR | |||||
| Contingent liabilities/total long-term debt (%)* | 6.8 | 11.8 | 10.6 | |||||
| Debt burden (%) | 3.1 | 3.0 | 3.6 | |||||
| Defined-benefit plan funded status (%)* | 83.6 | 78.6 | 69.7 | |||||
| Miscellaneous | ||||||||
| Salaries & benefits/NPR (%) | 56.1 | 58.2 | 61.4 | |||||
| Nonoperating revenue/total revenue (%) | 0.6 | 0.9 | 0.8 | |||||
| Cushion ratio (x) | 6.6 | 7.8 | 7.4 | |||||
| Days in accounts receivable | 48.2 | 44.9 | 45.7 | |||||
| Cash flow/total liabilities (%) | 2.4 | 9.6 | 6.5 | |||||
| Pension-adjusted long-term debt/capitalization (%)* | 55.6 | 51.3 | 54.7 | |||||
| Adjusted operating margin (%)§ | -5.7 | -0.9 | MNR | |||||
| MNR--median not reported. *These ratios are only for organizations that have defined-benefit (DB) pension plans or contingent liabilities. §Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to pandemic related relief funds recognized, but could comprise other nonrecurring items. | ||||||||
Table 2
| U.S. not-for-profit acute health care 'BB+' speculative-grade medians versus 'BBB-' stand-alone hospital medians--2022 versus 2021 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||||
| BBB- | BB+ | BBB- | BB+ | |||||||
| Sample size | 14 | 12 | 19 | 13 | ||||||
| Financial performance | ||||||||||
| Net patient revenue ($000s) | 466,422 | 285,986 | 417,020 | 212,947 | ||||||
| Total operating revenue ($000s) | 492,732 | 342,763 | 445,803 | 299,116 | ||||||
| Total operating expenses ($000s) | 498,587 | 345,334 | 454,729 | 277,516 | ||||||
| Operating income ($000s) | -4,810 | -2,774 | 6,554 | 4,115 | ||||||
| Operating margin (%) | -1.8 | 0.2 | 2.0 | 1.3 | ||||||
| Net nonoperating income ($000s) | 2,910 | 3,338 | 5,121 | 1,485 | ||||||
| Excess income ($000s) | -5,048 | 3,467 | 16,762 | 6,228 | ||||||
| Excess margin (%) | -1.5 | 1.6 | 3.9 | 3.1 | ||||||
| Operating EBIDA margin (%) | 4.2 | 5.7 | 6.9 | 6.1 | ||||||
| EBIDA margin (%) | 3.9 | 6.0 | 10.0 | 8.1 | ||||||
| Net available for debt service ($000s) | 20,645 | 18,290 | 46,129 | 17,867 | ||||||
| Maximum annual debt service ($000s) | 14,854 | 7,220 | 13,907 | 7,573 | ||||||
| Maximum annual debt service coverage (x) | 1.6 | 2.1 | 3.9 | 3.2 | ||||||
| Operating lease-adjusted coverage (x) | 1.3 | 2.1 | 3.3 | 2.4 | ||||||
| Liquidity and financial flexibility | ||||||||||
| Unrestricted reserves ($000s) | 143,633 | 78,616 | 175,469 | 74,542 | ||||||
| Unrestricted days' cash on hand | 135.6 | 111.6 | 160.7 | 148.5 | ||||||
| Unrestricted reserves/total long-term debt (%) | 100.4 | 95.7 | 111.9 | 102.5 | ||||||
| Unrestricted reserves/contingent liabilities (%)* | 594.5 | 851.0 | 2,100.2 | 889.4 | ||||||
| Average age of plant (years) | 13.9 | 14.0 | 15.3 | 13.6 | ||||||
| Capital expenditures/depreciation and amortization (%) | 73.3 | 138.6 | 81.1 | 119.7 | ||||||
| Debt and liabilities | ||||||||||
| Total long-term debt ($000s) | 197,735 | 77,319 | 135,091 | 83,614.0 | ||||||
| Long-term debt/capitalization (%) | 41.0 | 41.8 | 42.6 | 42.4 | ||||||
| Contingent liabilities ($000s)* | 37,955 | 19,307 | 10,460 | 40,853 | ||||||
| Contingent liabilities/total long-term debt (%)* | 17.5 | 8.2 | 6.7 | 15.0 | ||||||
| Debt burden (%) | 2.7 | 3.1 | 2.8 | 2.8 | ||||||
| Defined-benefit plan funded status (%)* | 96.4 | 84.4 | 91.6 | 78.3 | ||||||
| Miscellaneous | ||||||||||
| Salaries & benefits/NPR (%) | 58.3 | 56.1 | 58.6 | 62.4 | ||||||
| Nonoperating revenue/total revenue (%) | 0.9 | 0.6 | 1.4 | 0.9 | ||||||
| Cushion ratio (x) | 12.6 | 6.6 | 14.7 | 14.5 | ||||||
| Days in accounts receivable | 44.6 | 48.2 | 42.6 | 43.0 | ||||||
| Cash flow/total liabilities (%) | 6.8 | 2.4 | 12.5 | 10.2 | ||||||
| Pension-adjusted long-term debt/capitalization (%)* | 41.0 | 55.6 | 45.1 | 46.8 | ||||||
| Adjusted operating margin (%)§ | -3.3 | -5.7 | -1.6 | -0.8 | ||||||
| MNR--median not reported. *These ratios are only for organizations that have defined-benefit (DB) pension plans or contingent liabilities. §Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to pandemic related relief funds recognized, but could comprise other nonrecurring items. | ||||||||||
Ratio Analysis
We view ratio analysis as an important tool in our assessment of the credit quality of not-for-profit health care organizations in addition to other key considerations including our analysis of enterprise profile factors and forward-looking views relative to both the business and financial positions. The median ratios offer a snapshot of the financial profile and help in the comparison of issuers across rating categories. Tracking median ratios over time also presents a clearer understanding of industrywide trends and provides a tool to better assess the sector's future credit quality.
The financial statements used for medians and in our analysis include both obligated and nonobligated group members. For the 2020, 2021, and 2022 medians, unrestricted reserves exclude Medicare advance payments. All recognized CARES Act funding and other pandemic-related relief is included in total operating revenue.
Related Research
- U.S. Not-For-Profit Acute Health Care 2022 Medians: Historically Low Metrics Signify A Long Road To A New Normal, Aug. 7, 2023
- U.S. Not-For-Profit Health Care Stand-Alone Hospital Median Financial Ratios--2022, Aug. 7, 2023
- U.S. Not-For-Profit Health Care System Median Financial Ratios--2022, Aug. 7, 2023
- U.S. Not-For-Profit Health Care Children’s Hospital Median Financial Ratios--2022, Aug. 7, 2023
- U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios--2022, Aug. 7, 2023
- U.S. Not-For-Profit Health Care Ratings And Outlooks As of June 30, 2023, July 24, 2023
- U.S. Not-For-Profit Health Care Midyear Update 2023: Out Of Intensive Care And On The Path To Recovery Amid Ongoing Operating Challenges, June 28, 2023
- U.S. Not-For-Profit Acute Health Care Rating Actions, 2022 Year-End Review, Feb. 28, 2023
- Outlook For U.S. Not-For-Profit Acute Health Care: A Long Road Ahead, Dec. 1, 2022
Glossary of our ratios
Glossary: Not-For-Profit Health Care Organization Ratios, March 19, 2018
Quarterly rating actions
- U.S. Not-For-Profit Health Care Rating Actions, June 2022 And Second-Quarter 2023, July 24, 2023
- U.S. Not-For-Profit Health Care Rating Actions, March And First-Quarter 2023, April 25, 2023
This report does not constitute a rating action.
| Primary Credit Analysts: | Blake C Fundingsland, Englewood + 1 (303) 721 4703; blake.fundingsland@spglobal.com |
| Anne E Cosgrove, New York + 1 (212) 438 8202; anne.cosgrove@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 Contributors: | Shrutika Joshi, Pune; shrutika.joshi@spglobal.com |
| Akul Patel, Pune; akul.patel@spglobal.com | |
| Kunal Salunke, Mumbai; kunal.salunke@spglobal.com |
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