Communication is Key to Achieving and Maintaining Strong Bond Ratings
Analysts are people too, and they need to be able to put a face with a name. CFOs should insist on meeting with analysts in person at least once.
Bond ratings are a critical component of hospitals’ overall financial strength. They not only affect access to debt and its cost, but also impact negotiations with payers and vendors, help attract key employees, and improve hospitals’ competitiveness. When it comes to ratings, hospital CFOs tend to focus on quantitative metrics, but they should not overlook the importance of how the information is communicated to analysts.
The following are key tactics that allow hospitals to maintain stronger ratings by communicating and building goodwill with rating analysts:
- Conducting face-to-face meetings
- Encouraging senior leader involvement
- Preparing for rating presentations
- Dealing with negatives
- Reviewing draft reports
- Communicating between annual reviews
Conduct Face-to-Face Meetings
Analysts are people too, and they need to be able to put a face with a name. CFOs should insist on meeting with analysts in person at least once, and preferably whenever there are changes in senior management or major projects are announced.
Other senior leaders also should take the time to travel and meet with analysts and show sincere interest and appreciation in the rating process. More often than not, hospitals will build credibility with such meetings and be given more leeway if there are declines in operating performance or pressures on ratings. The rating process involves a number of qualitative factors, and getting the benefit of the doubt can often help organizations accelerate upgrades or avert downgrades.
Involve Senior Leadership
CFOs need to be the point person and attend all rating agency calls and meetings. In larger systems with multiple hospitals, directors of finance might take on day-to-day responsibilities related to the credit rating process. In those cases, CFOs should still attend calls and meetings.
CEOs and boards of trustees should also be involved. Analysts like to see everybody on the same page from operational and strategic planning standpoints. They are quick to notice when the team does not share common goals or strategic plans.
Involving CEOs and boards also presents opportunities for CFOs to educate their organizations on the importance of ratings and how they should be factored into strategic plans.
Prepare for Rating Presentations
CFOs and their teams should be directly involved in planning and rehearsing presentations. Presentations offer an opportunity to highlight performance and information not typically included in public disclosures, such as competitive markets and strategies, which weigh heavily in bond ratings. Confidential information should be clearly labeled so it doesn’t end up in published reports.
Slide decks usually start with organizational and key strategic initiative summaries, followed by market, utilization, and financial performance. Information already disclosed in financial statements should be summarized rather than reproduced verbatim.
If forecasts or projections are not available or have not been finalized—a common situation given the ever-changing nature of the industry—management should be prepared to discuss why.
Presentations should be rehearsed as a team to ensure smooth handoffs between presenters. In general, CEOs start presentations, followed by CFOs, and then back to CEOs for wrap ups.
Preparing for presentations allows assembled teams to align expectations on rating outlook processes and their outcomes, and if upgrades appear realistic, how to best make those cases.
Deal with Negative Factors
If hospitals have experienced downturns or other negative situations, those scenarios should be explained clearly. This will help analysts determine the likelihood that those challenges may reoccur. If multiple factors are at play, their individual impacts on operations and financial performance should be quantified. If it’s likely the same events could reoccur, contingency plans should be presented.
Review Draft Reports
After rating agency committees meet and before final reports are published, analysts will e-mail draft reports and ask management to point out any factual errors or confidential information.
It’s common for hospitals unfamiliar with the rating process to send editorial comments, some disagreeing with analysts. Unless based on factual errors, these comments will likely be ignored and may be viewed as evidence that management lacks a basic understanding of the process.
When reviewing draft reports, time is of the essence. Rating analysts will give management a window, which, depending on the agency, may be as little as a couple of hours. Therefore, it’s important for management to be prepared and not miss deadlines.
Keep in Touch Between Annual Reviews
Analysts should be kept up to date between rating reviews on any news that could materially impact ratings, including major capital projects, operational downturns, senior management turnover, major litigation, and natural disasters. These events should be shared before they come out in the newspapers so that analysts aren’t left to wonder what else organizations may be holding back.
All analyst requests for information should be acknowledged the same day and answered promptly. If hospitals need time, CFOs should provide estimates of turnaround times. If the information is already on Electronic Municipal Market Access (EMMA), it should still be e-mailed to analysts with a brief cover letter. This will save analysts time and will be appreciated.
Financial and operating performance are key to strong bond ratings, but how well information is communicated to analysts also makes a difference.
Pierre Bogacz is managing director and co-founder, HFA Partners, LLC, Tampa, Fla., and is a member of HFMA’s Florida Chapter.