Standard & Poor's Corp. said this morning it will begin to assign ratings on public and private mental health providers, including drug abuse, mental health, and mental retardation ficilities.
In this week's issue of Credit Week Municipal, the rating agency said these facilities, once thought to be too shaky to merit rating, have made large strides to insure they will be in place over the life of a bond sale.
Over the past 20 years, the process of providing mental health. drug abuse, and other services has shifted away from large hospitals and clinics. Smaller, community-based care has replaced institutionalization.
The agency said the maturation of these smaller facilities and the likelihood their need will increase were two main reasons it will begin to rate the credits. Standard & Poor's also cited the following reasons for the decision: service essentiality; provider and financial analysis: relationship of provider with funding agencies; provider's market share; and pledged security and legal structure.
In the report, Standard & Poor's said that essentiality of a facility's services is the foremost concern when rating the credit. Many states' courts have mandated that communities provide some degree of support for the. mentally retarded. Because of these mandates, a facility's survival is crucial.
Although the courts have been slow to require that communities provide drug abuse and day care facilities, the rating agency said those laws appear to be right around the corner.
Because of the facilities' smaller size, rating officials said it is easier to control both their day-to-day and longer-term operations.
"One of the states we talked to in preparing this report said a stay in a hospital-run facility runs about 70,000," said Jay H. Abrams, director at Standard & Poor's. "In a smaller center, the same job gets done for $40,000 and the care is much better."
He said the great growth in demand for the community-based care facilities was also a large reason for the agency's decision to rate these credits.
"We had some pressure to do this for the last couple of years, but felt our knowledge of the industry was unsatisfactory," Abrams said. "Now, though, the industry really needs guidelines on how best to handle its growth and how to best spend for the long term."
Abrams said the agency will not be rating a large number of credits. Rather, it will rate the "cream of the crop" of the industry, he said.
"We expect the bulk of these ratings to be in the double-B to single-A range," he said. "In Massachusetts, for example, there are 1,200 providers and we may rate as many as 10."
The agency said it will be reviewing the credits the same way as any other revenue bond-issuing entity. The issuer will be required to provide information dealing with the strength of its balance sheet, its cash flow to total debt ratios, documentation of past management, history of fund-raising, and other criteria in order to receive a rating.
In the past, most community facilities' financings were done without a rating and were privately placed.
Claire G. Cohen, executive vice president at Fitch investors Service Inc., said the rating announcement may change that practice. "The hitch about these credits used to be the concerns of bankruptcy and future development," she said. "The bulk of these deals were either unrated or pooled, insured deals."
Cohen said Fitch has only rated one of these credits, an issue done by the Tennessee Local Development Authority.
Although Moody's investors Service has not published a specific set of criteria for these financings, John N. Goetz, vice president and manager of the agency's health-care finance group, said it has reviewed several issuers, judging them on a case-by-case basis.
"The problem with these credits is that many are small and not that fiscally strong," Goetz said. "But as this industry grows, and we think it will, I think their overall strength and market presence will grow."
The Standard & Poor's report said the agency expects its reviews of these facilities to take longer than other credits and possibly to require a large number of site visits.
