Rating And Outlook Overview
The number of rated entities remains stable, although downgrades have caused changes in distribution. The total number of speculative-grade ratings has remained stable year-over-year, but some shifts in distribution have occurred primarily due to downgrades, either within the category or from the investment-grade categories. For example, the number of 'BB' and 'BB-' ratings has increased at the expense of low investment-grade and 'BB+' ratings. S&P Global Ratings believes negative shifts within the speculative-grade category could continue, given the very thin liquidity and continued operating losses for many speculative-grade rated issuers. Shifts at the lower end of the rating scale may be amplified by the very limited sample size and make trend analysis less meaningful. Although we took positive rating actions on a few speculative-grade providers, they were primarily the result of mergers with higher-rated organizations.
Covenant violations continue but there were no payment defaults during the last year. Due to their weaker debt service coverage and thin liquidity, speculative-grade issuers remain at a higher risk of breaching their financial covenants than investment-grade entities. Debt service coverage, in particular, is the most common covenant violation, followed by days' cash on hand and debt to capitalization. Although these violations often constitute a technical event of default, none of them have resulted in acceleration of the debt, as management teams have been proactive in successfully negotiating waivers or forbearance agreements with bondholders. In many cases, these agreements were remedied before maturity. Similarly, there have been no payment defaults during the last year.
Favorable outlook changes reflect some mitigation efforts to offset operating pressures. Relative to 2023, when almost half of speculative-grade providers had a negative outlook due to persistent operating difficulties, most recent data indicates just a third of organizations carry a negative outlook as of June 2024. Although negative outlooks are still high for this subset, the favorable shift is encouraging. We believe this improvement reflects some alleviation in sector pressures of the past few years, particularly in relation to labor and lower agency staff usage. Stable outlooks now represent close to two-thirds of rated providers, and therefore, we do not expect any significant increase in upgrades.
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Key Median Takeaways
Performance remains strained but has stabilized from the previous year. Key performance metrics such as operating margin and maximum annual debt service (MADS) coverage remain very weak, but the recent rapid pace of deterioration has slowed significantly. We believe this is a result of easing in high labor costs and inflationary pressures although this is partially offset by persistent payor denials. MADS coverage, in particular, is at the lowest level in more than a decade, which we believe could result in more covenant violations. Similar to their investment-grade peers, speculative-grade issuers have benefited from a rebound in investment income from 2022 lows. However, the percentage of non-operating income (mostly investment income) relative to total revenues for speculative-grade issuers remains below that of higher-rated peers due to lower median unrestricted reserves.
Operating performance is trending favorably when excluding nonrecurring funds. When relief and extraordinary income such as pandemic-related stimulus and Federal Emergency Management Agency (FEMA) funds and the proceeds from the 340b settlement are excluded from operations, speculative-grade medians indicate underlying year-over-year improvement in operating performance. Although operations remain negative, the magnitude of the losses has narrowed due to the alleviation in operating pressures described earlier and contributed to the reduction in negative outlooks on providers in the speculative-grade category.
The weakening in balance-sheet ratios comes to a halt. After experiencing substantial balance-sheet deterioration in previous years, speculative-grade issuers' balance sheets stabilized in 2023. The median for days' cash on hand dropped only slightly year-over-year, and the ratio of unrestricted reserves to long-term debt improved. In our view, achieving balance-sheet stability is critical for speculative-grade providers to demonstrate that they have capacity to service future debt obligations while also sufficiently reinvesting to cover deferred maintenance.
The balance-sheet gap between speculative- and investment-grade providers widens. Balance-sheet-related metrics have long been a major differentiator between speculative- and investment-grade providers. In 2023, this gap further widened, particularly when measured across the ratio of unrestricted reserves to long-term debt. We believe that this widening gap, coupled with other credit risks, will make it increasingly tough for speculative-grade providers to be upgraded to investment-grade.
Leverage remains stable despite the increase in capital expenses. The 2023 medians indicate an uptick in capital expenses by speculative-grade providers, suggesting that many are no longer able to defer maintenance and much-needed capital projects. The already elevated average age of plant, which continued to rise in 2023, further supports this view. However, this uptick in capital expenses did not result in higher leverage, measured as the ratio of long-term debt to capitalization. We believe that, amid high interest rates, debt issuance has become particularly cumbersome for speculative-grade issuers, which have less financial flexibility to cover higher carrying charges and meet their fully identified capital needs.
Table 1
| U.S. not-for-profit acute health care speculative-grade medians -- 2023 vs. 2022 vs. 2021 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Fiscal year | 2023 | 2022 | 2021 | |||||
| Sample size | 31 | 32 | 38 | |||||
| Financial performance | ||||||||
| Net patient revenue (NPR) ($000s) | 366,346 | 350,115 | 235,057 | |||||
| Total operating revenue ($000s) | 387,907 | 372,578 | 306,951 | |||||
| Total operating expenses ($000s) | 381,787 | 396,086 | 294,094 | |||||
| Operating income ($000s) | (15,332) | (13,659) | 4,868 | |||||
| Operating margin (%) | (3.8) | (3.3) | 1.6 | |||||
| Net nonoperating income ($000s) | 4,654 | 2,321 | 3,673 | |||||
| Excess income ($000s) | (9,954) | (6,581) | 6,596 | |||||
| Excess margin (%) | (2.4) | (1.1) | 3.5 | |||||
| Operating EBIDA margin (%) | 1.9 | 2.9 | 7.3 | |||||
| EBIDA margin (%) | 2.7 | 4.4 | 9.0 | |||||
| Net available for debt service ($000s) | 12,399 | 11,615 | 18,940 | |||||
| Maximum annual debt service ($000s) | 9,578 | 10,509 | 7,852 | |||||
| Maximum annual debt service coverage (x) | 1.1 | 1.4 | 2.4 | |||||
| Operating lease-adjusted coverage (x) | 1.1 | 1.2 | 2.1 | |||||
| Liquidity and financial flexibility | ||||||||
| Unrestricted reserves ($000s) | 71,425 | 85,551 | 66,432 | |||||
| Unrestricted days' cash on hand | 75.5 | 76.3 | 115.6 | |||||
| Unrestricted reserves/total long-term debt (%) | 58.5 | 56.9 | 80.9 | |||||
| Unrestricted reserves/contingent liabilities (%)* | 333.0 | 813.1 | 490.4 | |||||
| Average age of plant (years) | 14.5 | 14.0 | 14.2 | |||||
| Capital expenditures/depreciation and amortization (%) | 94.8 | 86.6 | 81.0 | |||||
| Debt and liabilities | ||||||||
| Total long-term debt ($000s) | 105,863 | 126,051 | 96,159 | |||||
| Long-term debt/capitalization (%) | 54.9 | 54.4 | 47.1 | |||||
| Contingent liabilities ($000s)* | 43,437 | 18,753 | 17,659 | |||||
| Contingent liabilities/total long-term debt (%)* | 14.8 | 6.8 | 11.8 | |||||
| Debt burden (%) | 2.8 | 3.1 | 3.0 | |||||
| Defined-benefit plan funded status (%)* | 82.5 | 83.6 | 78.6 | |||||
| Miscellaneous | ||||||||
| Salaries & benefits/NPR (%) | 58.5 | 56.1 | 58.2 | |||||
| Nonoperating revenue/total revenue (%) | 1.1 | 0.6 | 0.9 | |||||
| Cushion ratio (x) | 6.1 | 6.6 | 7.8 | |||||
| Days in accounts receivable | 47.3 | 48.2 | 44.9 | |||||
| Cash flow/total liabilities (%) | 2.0 | 2.4 | 9.6 | |||||
| Pension-adjusted long-term debt/capitalization (%)* | 54.9 | 55.6 | 51.3 | |||||
| Adjusted operating margin (%)§ | (4.6) | (5.7) | (0.9) | |||||
| *These ratios are only for organizations that have defined-benefit pension plans or contingent liabilities. §Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to stimulus funding, FEMA reimbursement, and 340B settlement funding, but could comprise other nonrecurring items. | ||||||||
Table 2
| U.S. not-for-profit acute health care 'BB+' speculative-grade medians vs. 'BBB-' stand-alone hospital medians -- 2023 vs. 2022 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||||
| BBB- | BB+ | BBB- | BB+ | |||||||
| Sample size | 17 | 10 | 14 | 12 | ||||||
| Financial performance | ||||||||||
| Net patient revenue (NPR) ($000s) | 400,607 | 299,118 | 466,422 | 285,986 | ||||||
| Total operating revenue ($000s) | 418,457 | 356,893 | 492,732 | 342,763 | ||||||
| Total operating expenses ($000s) | 466,862 | 369,819 | 498,587 | 345,334 | ||||||
| Operating income ($000s) | (4,515) | (2,487) | (4,810) | (2,774) | ||||||
| Operating margin (%) | (2.1) | (2.0) | (1.8) | 0.2 | ||||||
| Net nonoperating income ($000s) | 4,083 | 4,350 | 2,910 | 3,338 | ||||||
| Excess income ($000s) | (2,145) | (5,408) | (5,048) | 3,467 | ||||||
| Excess margin (%) | (0.4) | (1.6) | (1.5) | 1.6 | ||||||
| Operating EBIDA margin (%) | 2.8 | 4.0 | 4.2 | 5.7 | ||||||
| EBIDA margin (%) | 5.0 | 4.1 | 3.9 | 6.0 | ||||||
| Net available for debt service ($000s) | 20,580 | 14,001 | 20,645 | 18,290 | ||||||
| Maximum annual debt service ($000s) | 13,862 | 5,409 | 14,854 | 7,220 | ||||||
| Maximum annual debt service coverage (x) | 1.8 | 1.3 | 1.6 | 2.1 | ||||||
| Operating lease-adjusted coverage (x) | 1.6 | 1.2 | 1.3 | 2.1 | ||||||
| Liquidity and financial flexibility | ||||||||||
| Unrestricted reserves ($000s) | 134,520 | 69,616 | 143,633 | 78,616 | ||||||
| Unrestricted days' cash on hand | 111.5 | 85.8 | 135.6 | 111.6 | ||||||
| Unrestricted reserves/total long-term debt (%) | 102.7 | 84.2 | 100.4 | 95.7 | ||||||
| Unrestricted reserves/contingent liabilities (%)* | 822.0 | 526.4 | 594.5 | 851.0 | ||||||
| Average age of plant (years) | 14.1 | 13.9 | 13.9 | 14.0 | ||||||
| Capital expenditures/depreciation and amortization (%) | 91.5 | 152.5 | 73.3 | 138.6 | ||||||
| Debt and liabilities | ||||||||||
| Total long-term debt ($000s) | 225,927 | 65,393 | 197,735 | 77,319 | ||||||
| Long-term debt/capitalization (%) | 48.4 | 41.4 | 41.0 | 41.8 | ||||||
| Contingent liabilities ($000s)* | 35,972 | 21,603 | 37,955 | 19,307 | ||||||
| Contingent liabilities/total long-term debt (%)* | 14.7 | 34.1 | 17.5 | 8.2 | ||||||
| Debt burden (%) | 3.0 | 2.7 | 2.7 | 3.1 | ||||||
| Defined-benefit plan funded status (%)* | 86.3 | 91.0 | 96.4 | 84.4 | ||||||
| Miscellaneous | ||||||||||
| Salaries & benefits/NPR (%) | 56.9 | 56.6 | 58.3 | 56.1 | ||||||
| Nonoperating revenue/total revenue (%) | 1.2 | 1.1 | 0.9 | 0.6 | ||||||
| Cushion ratio (x) | 11.3 | 11.5 | 12.6 | 6.6 | ||||||
| Days in accounts receivable | 46.3 | 48.9 | 44.6 | 48.2 | ||||||
| Cash flow/total liabilities (%) | 4.3 | 2.8 | 6.8 | 2.4 | ||||||
| Pension-adjusted long-term debt/capitalization (%)* | 48.8 | 43.5 | 41.0 | 55.6 | ||||||
| Adjusted operating margin (%)§ | (2.1) | (2.9) | (3.3) | (5.7) | ||||||
| *These ratios are only for organizations that have defined-benefit pension plans or contingent liabilities. §Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to stimulus funding, FEMA reimbursement, and 340B settlement funding, 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 audited financial statements used for medians and in our analysis include both obligated and nonobligated group members. For the medians, unrestricted reserves exclude Medicare advance payments, and total operating revenue includes all recognized stimulus funding, FEMA reimbursement, and 340B settlement funding.
Related Research
- U.S. Not-For-Profit Acute Health Care 2023 Medians: Remarkably Level With Prior Year, But Performance Remains Notably Below Historical Norms, Aug. 7, 2024
- U.S. Not-For-Profit Health Care Children’s Hospital Median Financial Ratios--2023, Aug. 7, 2024
- U.S. Not-For-Profit Health Care Stand-Alone Hospital Median Financial Ratios--2023, Aug. 7, 2024
- U.S. Not-For-Profit Health Care System Median Financial Ratios--2023, Aug. 7, 2024
- U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios--2023, Aug. 7, 2024
- U.S. Not-For-Profit Health Care Outstanding Ratings And Outlooks As Of June 30, 2024, July 18, 2024
- Preliminary 2023 Medians For U.S. Acute Health Care Providers Indicate Continued Operating Pressures For Many, April 30, 2024
- U.S. Not-For-Profit Acute Health Care Rating Actions, 2023 Year-End Review, Feb. 8, 2024
- U.S. Not-For-Profit Acute Health Care Providers 2024 Outlook: Historical Peak Of Negative Outlooks Signals Ongoing Challenges, Dec. 6, 2023
Glossary
- Glossary: Not-For-Profit Health Care Organization Ratios, March 19, 2018
Quarterly rating actions
- U.S. Not-For-Profit Health Care Rating Actions, June And Second Quarter 2024, July 12, 2024
- U.S. Not-For-Profit Health Care Rating Actions, March 2024, April 15, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Marc Arcas, Chicago +1 (312) 233 7069; marc.arcas@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, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
| Akul Patel, CRISIL Global Analytical Center, an S&P affiliate, Mumbai | |
| Kunal Salunke, CRISIL Global Analytical Center, an S&P affiliate, Mumbai | |
| Additional Contact: | Chloe A Pickett, Englewood + 1 (303) 721 4122; Chloe.Pickett@spglobal.com |
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