In a new report, Moody’s Investors Services says that downgrades occurred in nearly all rating categories in the not-for-profit healthcare sector in the first quarter of 2009. Downgrades outpaced upgrades by a ratio of 3.8 to 1, with 19 downgrades and five upgrades, reflecting a significant deterioration in rating activity from the first quarter of 2008 with its eight downgrades and six upgrades for a 1.3 to 1 ratio. Moody's also affirmed 79 ratings in the first quarter of this year, representing 77% of all rating actions.
Primary factors contributing to the 19 rating downgrades in the opening quarter of the year include weakening operating performance from soft to declining volumes as a result of patient-deferred healthcare needs, rising bad debt expense and charity care, and deteriorating liquidity and balance sheet strength from investment losses and large interest rate swap collateral postings.
As of April 1, nine ratings were on Watchlist, all for possible downgrade. The first quarter of 2009 also saw five new ratings added to the not-for-profit healthcare sector portfolio, representing $1.7 billion of newly rated debt. "The high volume of ratings on Watchlist for possible downgrade coupled with the increased level of negative outlook revisions signals credit pressures will remain elevated through calendar 2009," said Moody's Associate Analyst Deepa Patel. The report, "Moody's Not-For-Profit Healthcare 2009 Quarterly Ratings Monitor First Quarter 2009 Activity Continues Trend of Elevated Downgrade Activity Seen in Fourth Quarter 2008," is available at moodys.com.
Moody's also announced it was developing new liquidity ratios for U.S. colleges, hospitals, other not-profits to assist investors in distinguishing among organizations and to boost comparability between organizations in its rating analysis. "Universities and hospitals generally disclose little or no information regarding the true liquidity of their cash and investments reported in their audited financial statements," said Moody's Vice President Roger Goodman. "Reported data on cash and investments lack sufficient and useful analytical content without additional information to supplement financial reporting requirements."
For both the higher education and healthcare sectors, Moody's ratios will address uncertainty of investment liquidity by asset class and manager type. In particular, analysts will likely exclude hedge funds that promise liquidity within a certain time period, but have the ability to implement "gates" to limit withdrawals in some circumstances. "A likely result of our analysis will be the development of multiple measures that both include and exclude certain investments that are subject to gates or other types of uncertainty, including valuation delays or opacity," said Goodman. The report, "Moody's Developing New Liquidity Ratios for U.S. Universities, Hospitals & Other Not-for-Profits," is available at moodys.com.
