Fitch: Most nonprofit hospitals have 5-year time horizon to see desired financial results from large capital projects

Most U.S. nonprofit hospitals' large capital and strategic projects have a five-year time horizon before Fitch Ratings expects to see the projects go from the beginning stages to fully realized project results, according to a report from the rating agency.

"Since a hospital's balance sheet will inevitably take a hit once a capital project goes through its various stages up to completion, the key will be how much cash the hospital can generate in order to soften the impact on the balance sheet," said Fitch Senior Director Kevin Holloran. "Whether the hospital can generate enough cash flow until the capital project is completed will go a long way in dictating whether the rating is affirmed, upgraded or downgraded."

During the estimated five-year time horizon, Fitch notes ratings may be assigned on a case-by-case basis. Historically, the agency said, investors or obligors involved in hospital projects have a hard time determining how long a hospital will maintain a rating while waiting for desired financial results.

To help with this, Fitch launched the five-year Fitch Analytical Sensitivity Tool, recently renamed Fitch Analytic Stress Test, or FAST. The interactive tool measures the financial flexibility of healthcare organizations in various hypothetical stress scenarios, such as upcoming capital projects.

Fitch said some investors may have concerns about whether increased sector pressure will make it more challenging for hospitals to adhere to the agency's five-year scenario analysis.

"Not necessarily," Mr. Holloran said.

"Hospitals are showing surprising resiliency thus far in light of recent broader tax reform changes and other secular pressures," he said. "If there is a subset of nonprofit hospitals that could be affected, however, it would be those organizations that either begin capital projects from a position of financial weakness or are unable to grow top-line revenues."

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