Healthcare companies face wall of maturing debt amid cash shortage

Not only do healthcare companies, including hospital groups, face sustained challenges related to labor shortages and inflation into 2023, they are up against a wall of maturing debt looming large in 2024 and 2025, analysts at Moody's said.

Increasing numbers of healthcare companies have their credit rating at "B3-" or below as a result of such challenges. Healthcare now accounts for approximately 16 percent of the companies on Moody's list at that level, compared to less than 4 percent as of Dec. 31, 2015.

There is significant danger of default for such companies as they will seek to restructure such expensive debt while also dealing with shorter-term cash flow issues.

Many of those companies are owned by private equity groups that borrowed money in a different time, attracted by the apparent safety of the sector, Peter Abdill, managing director corporate finance at Moody's, told Becker's.

"They levered up these companies in a much better credit environment and then the world went haywire," he said. "They saw a defensive sector with demographic advantages and thought, 'What could go wrong?'"

The COVID-19 pandemic turned everything on its head, he said, leading in part to historically high interest rates, among other issues.

"There can be surprises, there can be volatility, there can be events that nobody expected," Abdill said. "It didn't pan out the way they thought."

Almost 90 percent of the healthcare companies rated at "B3-" or below are owned by private equity groups. Of the 34 such companies, approximately 38 percent are hospital or healthcare facility providers.

The sector can expect significant volumes of distressed sales activity going forward as pressured companies seek to offload debt, but it will be challenging amid lender hesitancy, said Jean-Yves Coupin, vice president and senior analyst at Moody's.

"But there are a lot of examples of investors buying distressed debt, and some players in the market will be attracted to higher yields," he said.

Four numbers to know:

  • $4.04 billion: The amount of maturing debt for such rated healthcare companies in 2024.
  • $12.6 billion: The amount of maturing debt for such rated healthcare companies in 2025.
  • $65 billion: The amount of outstanding debt for the 34 healthcare companies on the "B3-" and below list, an increase of 57 percent compared to March 2020.
  • Thirteen healthcare companies have defaulted since January 2020 amid high levels of debt and weak operating performance.

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