A new report from Moody’s Investors Service warns that unfavorable interest rate swaps may expose some not-for-profit hospitals to a ratings downgrade.
The report, Interest Rate Swaps Cause New Liquidity Stress for Some Healthcare, Higher Education and Other Not-for-Profit Borrowers, notes that the current low interest rate environment is posing two primary risks for borrowers with floating-to-fixed interest rate swaps. First, collateral calls or termination payments might significantly reduce a borrower’s liquidity. Second, material swap liabilities could result in violations of bond covenants, especially when these liabilities are combined with investment losses.
A particular concern for not-for-profit hospitals are covenants that require a minimum number of days cash on hand. A collateral posting requirement might substantially reduce the unrestricted cash available to meet this covenant.
The report is available at www.moodys.com (subscription required).
