Top Ten Things A Hospital Can Do To Improve Bond Ratings

HFA Partners  |  August 6, 2011

The last three years of turbulent market activity and volatility across all business sectors has left the bond market off track and has led to numerous rating downgrades. According to Moody’s, in 2010 downgrades again exceeded upgrades for U.S. not-for-profit healthcare borrowers ratings. There are actions you can begin to take now to improve your chances of an upgrade and improve your access to the capital markets.

The last three years of turbulent market activity and volatility across all business sectors has left the bond market off track and has led to numerous rating downgrades. According to Moody’s, in 2010 downgrades again exceeded upgrades for U.S. not-for-profit healthcare borrowers ratings. There are actions you can begin to take now to improve your chances of an upgrade and improve your access to the capital markets.

Healthcare providers are faced with multiple challenges; it’s time to closely examine your long-term capital strategy, your approach to capitalization and button up the loose ends that may have been overlooked in years gone by. Leveraging needs not be limited solely to long-term debt, but can also blend short- and medium-term funding options to create a more flexible capital structure, improve key financial metrics and help put your hospital or system on a stronger footing for whatever may be coming down the road.

 

For decades hospitals and systems have taken the "it’s what we've always done" approach to capitalizing growth and plant/property upgrades, but this approach may not work anymore in today's capital markets. Concerned about the recession, bond market volatility and uncertainty surrounding healthcare reform, many hospitals have been hoarding cash at the expense of necessary capital investments. As a result, their leverage has dropped and liquidity has improved, but their age of plant has gone up. By taking a closer look at how rating agencies balance leverage against liquidity and assess project ROI, they could continue to improve their key ratios and at the same time, start funding their project backlog.

 

Taking advantage of record low medium-term interest rates, retaining higher levels of cash and investing cash when it makes sense — into expansion and creative growth rather than investing it in revenue generating capital equipment or IT/EHR infrastructure and upgrades — will deliver a greater ROI for your money. Even your cash has a "cost of capital" that can be measured by your relative savings once you compare your cost of borrowing for that particular project or purchase. It may make sense to pay cash for part of a project and utilize debt for another part.

 

Bond ratings are a critical piece of the puzzle because they not only affect the coupon on future bond issues; they also influence your cost of bank and real estate financing, their terms, your strategic relationships, opportunities for joint ventures and the ability to attract top talent. Here are a few steps you can take to make a positive impact on your ratings:

Top 10 things to improve a hospital's bond ratings

 

1.  Know your past rating history. Review prior rating reports, the history of communications, the analyst, the quality of the relationship, history of meeting expectations, any surprises (good and bad), etc.

 

2.  Put a plan together on where you want to be with your rating in 1-5 years, how you’re going to get there, and get buy in from leadership.  If your plan is not written, it’s not a plan.

 

3.  Take a crash course in how agencies rate hospitals, what are key ratios, why more debt can be better than less if it preserves liquidity, why not all debt is created equal (e.g,. put debt with immediate acceleration).

 

4.  Understand rating is an art which involves many qualitative aspects. Only half of a rating is correlated to key ratios, the other half includes market positioning, reimbursement environment, management turnover, quality of financing team, etc. No amount of work can make up for a deteriorating financial picture, but ignoring the qualitative aspect can result in a sub-par rating.

 

5.  Be very responsive to analysts, better yet, be proactive. Don’t let the analyst read about your new project or your union problems in the press, talk to them before hand. They are used to confidentiality and will never disclose sensitive info.

 

6.  Don’t worry about restating the obvious. You only have one rating analyst (or two or three), but your rating analyst may be covering dozens of other hospitals.

 

7.  Don’t over-promise and under-deliver. It’s tempting to put out optimistic forecasts, but analysts don’t like surprises.

 

8.  Build a personal rapport with the analyst. Hold a face-to-face meeting to introduce executive management and key board members, such as a lunch or dinner. Give them an opportunity to get to know you as a person they can rely on.

 

9.  Have the board formally decide on rating strategy, and communicate this goal to the agency. Be clear about it without pressuring the analyst.

 

10.  Don’t wait until you need to sell bonds to develop your strategy. Upgrades can take a very long time, downgrades are much quicker.

 

The time to start managing your ratings is now. So is the time to start re-thinking your overall approach to capitalization. Leveraging technology, best practices, networking with industry professionals and counterparts, becoming more involved with trade associations and opening your door to more professionals that have meaningful ideas and solutions to share can all have an impact on your ability to make a change for the better.  We can change healthcare from within; be a part of the progress!

This article was co-authored by Shawn McBride at People's Capital.

 

 



This material is intended for general information purposes only and does not constitute legal advice. For legal issues, readers should consult legal counsel. To discuss this article or municipal advisory services, email info@hfapartners.com or call 888-699-4830. HFA Partners, LLC is an Independent Registered Municipal Advisor registered with the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB) under the Dodd-Frank Act of 2010.
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