Trending in Healthcare Treasury and Capital Markets is a biweekly blog providing updates on changes in the capital markets and insights on the implications of industry trends for Treasury operations, authored by Kaufman Hall Managing Director Eric Jordahl.
Treasury yields have moved lower as COVID-variant concerns and other economic headwinds overshadow the previous inflation chatter. Markets clearly remain in a reactive mode, which suggests that we are at a point in the stabilization process that is closer to the crisis stage than anything resembling normalization. As hard and risky as it is to be an investor right now, it is easier to be a borrower: selling capital structure risk by issuing long duration fixed remains the compelling option with an extra benefit coming from tax-exempt issuance, if that option is available.
SIFMA reset this week at 0.02%, which is approximately 23% of 1-Month LIBOR and represents no change versus the July 7 reset.
July 13 Rating Agency Webinar Recap
My colleague Terri Wareham and I had another great conversation with our rating agency panel last week: Kevin Holloran from Fitch, Lisa Goldstein from Moody’s, and Suzie Desai from Standard & Poor’s. This was our eighth check-in with this same group since COVID began and it has been incredibly helpful to get their running commentary across the entire pandemic experience. You can access a recording of the session here but some of the key elements we discussed are offered below.
- Overall perspectives on the healthcare sector. The verdict is that the healthcare industry demonstrated a lot of resiliency throughout the pandemic, with important positives ranging from strong management to various federal initiatives. There was a recognition that we have entered a period of relative calm, but that headwinds—and potentially significant ones—are looming and full stabilization may take longer than anticipated. Balance sheets and liquidity have held up well; the pressure points are embedded in operations with volumes that have not fully recovered and expense escalation that may not be transitory.
- Are strategies shifting? There is no indication of a fundamental shift in strategy versus a refocusing or refinement of the pre-COVID strategy playbook. Digital, telehealth, and similar technology threads remain an area of focus for many organizations.
- What to cover in the rating process? It is still important to unpack the COVID experience in addition to addressing the core “traditional” elements: market role and position, operations and strategies, financial position and performance, capital spending, and balance sheet composition. Many organizations are now looking beyond a one-year budget horizon and offering 2 or 3 years of forecasted performance, which seems to be an encouraging indicator of relative stability.
- Observations on median ratios. The team noted that while medians help set some guardrails, they are a product of the rating process—not a driver. There was an observation about the potential benefit of targeted peer analytics versus medians; either way, 2020 median levels may be dislocated, and relative performance assessments may be more difficult.
- Operating performance. Operating performance remains the primary headwind. Volumes have been recovering but not to pre-COVID levels and there is some question as to whether the last 5% - 10% will return. Volume and technology trends raise questions around the need for adjustments to the reimbursement model—and what might transpire during contract renegotiation processes. The equally pressing consideration is the backup in expenses and the potential that there are now “permanent inflators” in the form of labor costs, supply levels, and perhaps even some levels of operational inefficiency; labor pressures ranging from wage inflation to staffing availability to workforce sustainability issues like burnout and morale were noted. The continuing revenue and expense headwinds have resulted in quarter-to-quarter margin volatility.
- Balance sheet performance. Balance sheets continue to serve as the credit anchor. Liquidity has been particularly important in buying time to weather operating variability, and lines of credit that were put in place during COVID are being extended, although perhaps at reduced amounts. Capital spending is returning to pre-COVID levels, perhaps supported by the strong liquidity positions. Leverage has represented an efficient tool for generating—and preserving—liquidity and funding capital; attention is being paid to the use of lease obligations and other alternate forms of financing.
- Scale and market position observations. Market scale created important advantages during COVID. While federal programs helped everyone, regional and national systems seemed to have faster access to PPE, external liquidity resources, leverage, etc. If balance sheet scale provided time and space to weather operating dislocations, operating scale enhanced response flexibility and is expected to remain an important credit consideration. Legislation is a watch point, especially related to M&A; consolidation and coordination efforts are expected to continue, but regulatory pushback may emerge as a complicator and a sector credit consideration.
Thanks again to Suzie, Lisa, and Kevin for their input. Our next conversation with this group will be at Kaufman Hall’s virtual Healthcare Leadership Conference, which is scheduled for October 14, 2021. You can register for the annual conference here.