Today, Fitch published an exposure draft and FAQ's discussing proposed revisions to how the agency rates not-for-profit hospitals and health systems. The announcement was posted on the Fitch website at: https://www.fitchratings.com/site/uspf/comment.
In doing so, Fitch follows in the footsteps of S&P, who updated its methodology for hospitals in 2014. At the time, S&P expected about 25% of its rating universe would be affected, and since then, the S&P revised methodology has turned out mostly positive. Moody's methodology has not been updated since 2012.
Fitch says the proposed revisions are aimed at improving how the agency's analysis is communicated to the markets, with a focus on more transparency about expectations.
Fans of mathematics will be disappointed: the proposed criteria does not create a formula-driven scoring model as ratings will continue to be the analyst's synthesis of all relevant credit considerations including qualitative factors.
The Fitch FAQ's does include a "rating positioning table" which suggests ratings will be based on four key metrics: revenues, operating, debt to EBITDA and cash to debt. However, the table is of somewhat limited value since "Revenue" is described as "midrange" and there is no definition of "Operating". Also, the suggested rating is a category (AA, A, BBB, below) rather than a specific rating notch.
As a consolation prize for disappointed quants, Fitch released a model named Fitch Analytical Sensitivity Tool or "FAST", a dense Excel spreadsheet that examines a hospital's investment portfolio allocation among six asset categories and simulates returns over the next 5 years. The model combines the returns with the hospital's fundamentals to generate two scenarios:
- Base Case: a scenario that reflects Fitch's baseline cash flow expectation in a stable economic environment. The base case takes into account historical and expected performance as well as analytical judgment.
- Rating Case: a stress scenario that applies a "mild stress", followed by a recovery, to evaluate the hospital's resiliency to an economic cycle. The rating case assumes revenue and expense growth rates consistent with national health expenditure rates by payor, based on hospital-specific payor mix. Fitch says the two cases create a forward-looking view of the financial profile, which is then combined with key rating factors to drive the final rating.
Fitch says the revised criteria are not a major change in the agency's approach and that it will continue to focus on revenue and expenses in relation to balance sheet strength.
The revisions are expected to affect less than 15% of all rated hospitals, but Fitch is not saying how many of those will experience an upgrade rather than a downgrade.
The comment period on the proposed new rating criteria closes on Oct. 20 and the final criteria will be published on Nov. 6 and immediately applied to all new issue and surveillance rating reviews.
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