Proposed Changes In Rating Approach For Tax-Secured Hospital Debt

Transcription

1 Criteria Governments Request for Comment: Proposed Changes In Rating Approach For Tax-Secured Hospital Analytical Contacts: Jennifer J Soule, Boston (1) ; jennifer.soule@spglobal.com Cynthia S Keller, New York (1) ; cynthia.keller@spglobal.com Martin D Arrick, San Francisco (1) ; martin.arrick@spglobal.com Kenneth T Gacka, Centennial (1) ; kenneth.gacka@spglobal.com Criteria Contacts: Liz E Sweeney, New York (1) ; liz.sweeney@spglobal.com Robert D Dobbins, CPA, San Francisco (1) ; robert.dobbins@spglobal.com Nik Khakee, New York (1) ; nik.khakee@spglobal.com Mark Puccia, New York (1) ; mark.puccia@spglobal.com Table Of Contents OVERVIEW AND SCOPE IMPACT ON OUTSTANDING RATINGS QUESTIONS RESPONSE DEADLINE CURRENT RATING APPROACH PROPOSED RATING APPROACH PROPOSED ENHANCEMENTS TO HEALTH CARE ORGANIZATIONS CRITERIA APPENDIX: SUMMARY OF CHANGES TO THE ORIGINAL RFC Frequently Asked Questions DECEMBER 11,

2 Criteria Governments Request for Comment: Proposed Changes In Rating Approach For Tax-Secured Hospital 1. S&P Global Ratings is seeking additional market feedback related to its request for comment, "U.S. And Canadian Not-For-Profit Acute Care Health Care Organizations" (health care organizations RFC), published on June 8, The additional feedback we are seeking is related to proposed changes to our rating approach for tax-secured hospital debt. We propose to incorporate analysis of tax-secured hospital debt into the health care organizations criteria. 2. Following the publication of the final health care organizations criteria, the tax-secured debt of hospitals (including hospital districts) would be rated using our health care organizations criteria. 3. We are also proposing to modify our health care organizations RFC to enhance our analytic judgement with respect to the credit benefits of tax revenue in the analysis of a hospital. If approved, we intend to retire the "Tax-Secured Hospital " (published May 3, 2007) following publication of the final health care organizations criteria. OVERVIEW AND SCOPE 4. The proposal is based on the following: In our view, the likelihood of timely repayment of tax-secured debt is tied to to the general creditworthiness of the hospital, which we express as its issuer credit rating (ICR). We believe payments for property tax-backed debt, like revenue debt, are at risk of interruption if the hospital is distressed or in bankruptcy. The "Tax-Secured Hospital " criteria would no longer be needed, because the health care organizations criteria, with the proposed enhancements, contain the necessary elements to evaluate the benefits of tax revenues to a hospital's creditworthiness. Property tax revenues provide benefits to hospital districts, including revenue diversity, debt payment support, reduced reliance on potentially volatile patient flow, and increased cash flow. These benefits are best evaluated holistically as part of the analysis of a hospital's ICR. IMPACT ON OUTSTANDING RATINGS 5. S&P Global Ratings currently rates the debt of about 50 hospital districts that issued tax-secured or revenue-secured debt. Assuming that these entities maintain their current credit characteristics, testing suggests that approximately 60% would be downgraded by up to three notches, approximately 10% would be upgraded, generally by up to two notches, and approximately 30% would remain unchanged. DECEMBER 11,

3 Key Publication Dates Original publication date: Dec. 11, 2017 Response deadline: Dec. 22, 2017 Effective date: Immediately upon publication of final health care organizations criteria These criteria address the fundamentals set out in "Principles Of Credit Ratings", published on Feb. 16, 2011 QUESTIONS 6. S&P Global Ratings is seeking responses to the following questions: What is your view of the proposal to discontinue using the "Tax-Secured Hospital " criteria for tax-backed debt issued by hospital districts? What is your view of the proposal to rate tax-secured debt of hospital districts using a hospital's issuer credit rating as the starting point and incorporating the benefits of taxing authority into the issuer credit rating? What is your view of the proposed enhancements to our health care organizations criteria related to tax-secured hospital debt (see the section, "Proposed Enhancements To Health Care Criteria" for more details). RESPONSE DEADLINE 7. We are requesting that market participants provide their feedback on the proposed analytic approach, including enhancements to the health care organizations RFC, by Dec. 22, 2017, via at CriteriaComments@spglobal.com. All comments must be published but those providing comments may choose to have their remarks published anonymously or they may identify themselves. Generally, we publish comments in their entirety, except when the full text, in our view, would be unsuitable for reasons of tone or substance. CURRENT RATING APPROACH 8. Under our current rating approach, the rating on a hospital district's tax-secured debt is based on three layers. First, we determine the general obligation (GO) strength of the district based on its tax base. Next, we perform an assessment of the credit strength of the hospital. Finally, we apply "Tax-Secured Hospital " criteria, which contain a series of rating caps that limit the differential between the GO assessment and the hospital assessment, with the final rating never exceeding the GO rating. The differential can be greater with a stronger hospital assessment than a weaker one, and when the hospital is very weak, the GO rating cannot exceed the hospital assessment. 9. We are proposing to revise this approach because it has resulted in some severe downward rating actions when hospital creditworthiness has weakened, and it results in ratings that are stronger than what we view as the hospital's fundamental credit strength. DECEMBER 11,

4 PROPOSED RATING APPROACH 10. Under the proposed approach, the tax-secured debt of a hospital district would be rated based on the hospital's creditworthiness, including the benefits of tax revenues available to the hospital. Specifically, the hospital district's ICR could be up to four notches higher than would otherwise be the case for a similar hospital that does not have a tax levy. 11. This approach also reflects our view that all of a hospital district's revenues, regardless of their source, are at risk of interruption or stay if the hospital is stressed or in bankruptcy. We believe it is impractical to attempt to separate tax revenues levied on behalf of the hospital from the hospital's operations. The proposed rating approach is also simpler than the current approach. It would require application of only one criteria (health care organizations criteria), in contrast to the current approach that requires the application of three criteria. PROPOSED ENHANCEMENTS TO HEALTH CARE ORGANIZATIONS CRITERIA 12. We are proposing to enhance our health care criteria with respect to incorporating the strength that tax revenues can add to a hospital's credit profile. This could result in an ICR that is up to four notches higher than would otherwise be the case. This benefit would apply whether the taxes are levied for debt service or for operations. In determining the magnitude of such credit benefit, if any, we would evaluate various factors, such as the size and wealth of the tax base -- to the extent that it differs from the economic fundamentals assessment as determined under the health care organizations criteria --, diversity of the tax base, growth rate of assessment values, significance of tax revenues to total operating revenues, and capacity for increasing tax support (both legally and politically). The potential for four notches of improvement to the hospital's ICR is two notches greater than the current hospital criteria allows for, in recognition of the deep tax base strength that some hospital districts demonstrate and the significant financial flexibility that tax revenues bring to some hospital districts. APPENDIX: SUMMARY OF CHANGES TO THE ORIGINAL RFC 13. Following is a summary of the proposed changes to the health care organizations RFC. The changes relate to the following sections of the RFC: paragraphs 1 and 3, table 2, and the "Frequently Asked Questions" section. Readers can view the complete RFC here and compare with the revisions below. Paragraph S&P Global Ratings is requesting comments on proposed changes to its methodology for assigning ratings and related credit products to U.S. and Canadian not-for-profit health care organizations. In addition, we are proposing to combine into these criteria, "U.S. Not-For-Profit Acute-Care Stand-Alone Hospitals", published Dec. 15, 2014, and "Tax-Secured Hospital ", published May 3, In bringing together these three pieces of criteria, we reformatted the Stand-Alone Hospitals criteria and request comments on those proposed changes as well. These proposed criteria would be implemented under the rating framework established in chart 1. If adopted, these proposed criteria would DECEMBER 11,

5 supersede the following three pieces of criteria: "Not-For-Profit Health Care", published June 14, 2007, "U.S. Not-For-Profit Acute-Care Stand-Alone Hospitals", and "Tax-Secured Hospital ". All terms followed by an asterisk (*) are defined in the glossary in Appendix 2. Paragraph S&P Global Ratings rates the debt of approximately 150 health care systems and 350 stand-alone hospitals, in addition to approximately 50 hospital districts that would be included in the scope of the proposed criteria. Assuming that stand-alone hospitals maintain their current credit characteristics, testing suggests that a vast majority of the ratings would remain unchanged under the proposed criteria because the substance is largely the same as the criteria published Dec. 15, 2014, even under the revised form of the criteria. Assuming that health care systems maintain their current credit characteristics, testing suggests that about 70% of the ratings would remain unchanged under the proposed criteria, while roughly 10% of the remaining ratings would be lowered and 20% would be raised. Of the 30% likely to change, testing indicates that over 90% will likely be one notch, while up to 10% will be two or more notches. Assuming that hospital districts maintain their current credit characteristics, testing suggests that approximately 60% would be downgraded by up to three notches, approximately 10% would be upgraded, generally by up to two notches, and approximately 30% would remain unchanged. Table 2 (Revised Portion) Examples Of Overriding Factors And Rating Caps To The Initial Indicative Rating Overriding condition that would generally: Additional Comments Notch the indicative rating up Health care organization has an ability to levy taxes Indicative rating may be up to four notches higher than suggested by table 1. The number of notches is determined by a combination of size and wealth of the district population to the extent that it differs from the economic fundamentals assessment, diversity of the tax base, growth rate of assessment values, significance of tax revenues to total operating revenues, and capacity for increased tax levies (both legally and politically). The highest notching benefits generally accrue to those hospitals with a strong and growing tax base and where management shows a willingness and ability to increase tax levies for operations. Frequently Asked Questions Are tax-secured hospital districts within the scope of the proposed criteria? 16. Yes. Tax-secured hospital districts are within the scope of the proposed criteria, which would supersede "Tax-Secured Hospital ", published May 3, The proposed criteria provide a framework for arriving at the final issuer credit rating (ICR) of tax-secured hospital districts. The ICR reflects the general creditworthiness of the entity and does not incorporate the pledge or covenants provided to bondholders for any particular debt instrument. In the final step of our analysis, if we are rating a specific debt instrument, we review the legal structure of the instrument, including the pledge and covenants, to determine the issue credit rating. This analysis most often results in an issue credit rating that is the same as the ICR for tax-secured hospital districts debt. Are there situations where the proposed criteria may not apply to tax-secured hospital district debt? 17. Yes, if we conclude that the hospital's operating risks are separated from the district (for example, the district may sell the hospital conveying full control and responsibility to a third party, or hospital operations may otherwise cease to exist). In these cases, which we expect to be infrequent, these criteria generally would not apply. In those DECEMBER 11,

6 circumstances we would apply the criteria most relevant for the remaining revenue streams supporting the debt. What approach is used to rate a hospital district that leases operations of the hospital to a third party while retaining debt and taxing and some revenue collection authority at the district level? 18. The rating approach will generally depend on our view of the terms of the operating agreement and the operator risk. Where termination events are present, we will generally combine the leased facilities' financials with the district's and if the operator is part of a group, we would base the combination on our view of the most relevant level of the operator's organization to the district's risk. This view may depend on the terms of the lease agreement, the organizational structure of the operator, and the operator's history with other similar arrangements. 19. These criteria represent the specific application of fundamental principles that define credit risk and ratings opinions. Their use is determined by issuer- or issue-specific attributes as well as S&P Global Ratings assessment of the credit and, if applicable, structural risks for a given issuer or issue rating. Methodology and assumptions may change from time to time as a result of market and economic conditions, issuer- or issue-specific factors, or new empirical evidence that would affect our credit judgment. DECEMBER 11,

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