CHICAGO -- The amount of BBB-rated health care debt has grown 15% over the last decade, partly due to deteriorating credit quality in the health care industry and greater investor acceptance of lower rated new issues, Standard & Poor's Corp. said last week.
Changes such as increased competition and revision of the federal government's Medicare reimbursement system, have contributed to an increase in BBB-rated debt, said Laura Kuffler, an associate director at Standard & Poor's. The triple-B category also has grown because of greater acceptance of those bonds by investors, many of whom are in search of greater yields, she said.
"Ten years ago, getting a triple-B rating wasn't viewed favorably. Today it's acceptable," Kuffler said.
A decade ago, most BBB-rated health care providers earned the rating due to a downgrade, Kuffler said. But today, only 38.6% of more than 250 health care issuers whose debt is rated in the BBB category by Standard & Poor's were downgraded to this level, according to last week's edition of CreditWeek Municipal. The remaining debt was comprised of new issues, Standard & Poor's said.
Health care issuers with debt rated in the triple-B category have "adequate capacity to pay interest and principal," Standard & Poor's said. However, "adverse economic conditions are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories," the agency said.
BBB-rated hospitals face the same health care reform pressures as institutions rated otherwise, Standard & Poor's said, but they may have less flexibility to respond to the changes than higher-rated credits.
"As the health care environment continues to evolve, based on growing managed care penetration and health care reform initiatives, BBB credits are likely to be under increased pressure to remain profitable," the rating agency said.
Standard & Poor's said it expects the number of BBB-rated institutions to rise in the future, due to increased financial pressures in the health care industry.
Characteristics such as market dominance and the ability to successfully form integrated provider networks will pay "an increasing role in maintaining credit quality," the agency said.