Fitch Ratings reports that in 2016, the agency saw the highest number of public finance upgrades of the last 10 years, outnumbering downgrades more than 2:1. But in the not-for-profit hospital sector, the ratio of upgrades to downgrades was down from 2015 and continues to vary significantly between rating agencies.
In 2016, Fitch Ratings reports it upgraded the bond rating of 332 public finance borrowers and downgraded 153. The 2:2 ratio of upgrades to downgrades was unchanged from 2015, when Fitch upgraded 148 borrowers and downgraded 65.
At first glance, the acute care hospital sector did not fare as well. Together with other healthcare borrowers, acute care represents close to 10% of public finance. According to data from Fitch Ratings, S&P Global Ratings and Moody’s Investor Service, the number of hospital upgrades in 2016 was roughly equal to downgrades, a sizeable swing from 2015 when upgrades exceeded downgrades by 45%1,2.
But the ratio of upgrades to downgrades is of limited use: due to the relatively small number of rating actions, a minor change in either number can have a disproportionate effect on the ratio in any given year. Looking at upgrades and downgrades as a percentage of rated providers tells a more balanced story, as the next chart shows. Historically, 7% of hospitals are upgraded and another 7% downgraded each year, with 85% of hospitals affirmed. In 2016, 6% of providers were upgraded, compared to 8% in 2015. While the change is material, it is hardly indicative of a sector meltdown.
While as a whole, the percentage of upgrades and downgrades has been relatively stable, rating agencies differ in their actions. As shown in the next chart, Fitch3 and S&P have upgraded more than downgraded in the last five years. The average ratio of upgrades to downgrades over the last five years was 1.5:1 for Fitch, and 1.2:1 for S&P. Moody’s average ratio was 0.7:1, meaning the agency has downgraded a third more providers than it has upgraded.
The difference in rating agency actions is unlikely to be due to the composition of each agency’s portfolio of rated hospitals: the median rating for all three agencies is in the “A” category.
The next chart shows downgrades as a percentage of rating actions for each agency.
Reading sector outlook reports to gain insights on credit quality trends is not much help as rating actions often end up contradicting an agency’s outlook on the sector. Nevertheless, both S&P and Moody’s currently maintain a stable outlook on hospitals, pointing out this could change depending on what happens to the Affordable Care Act under the new administration. Fitch maintains a stable outlook on hospital ratings for 2017, but a negative outlook on the sector in the longer term.
1 Rating actions due solely to S&P’s revised hospital criteria are excluded (35 upgrades and 16 downgrades in 2015).
2 Rating actions associated with tax-supported providers are excluded.
3 Fitch reviews “A” category hospitals every other year; Fitch data is based on the number of rating actions rather than the number of rated providers.