Tough year ahead for healthcare credit ratings, more defaults expected

Moody's Investor Services expects healthcare company defaults to increase next year as credit ratings deteriorate.

In a Nov. 30 report, Moody's noted nearly 21% of the 192 North America-based healthcare companies on its credit ratings list were at B3 Negative ratings or lower, up from nearly 18% on Dec. 31, 2022. In 2023, 10 healthcare companies defaulted and nine on the B3 negative list were further downgraded, according to the report.

"Against a backdrop of excessive leverage, elevated interest rates and expiring interest rate hedges, many companies will have no other options but to default in 2024," the report authors noted.

Four other observations from Moody's:

1. More than 60% of B3N or lower rated companies have weak liquidity, and with refinancing more challenging than last year, more companies will restructure or default next year.

2. Nearly all of the B3N or lower rated companies have excess leverage from aggressive merger and acquisition strategies, often tied to private equity owners. Labor cost increases are also hurting their performance.

3. Companies are trying to improve operating conditions, restructuring and amending and extending debt transactions to avoid default. Moody's warns these methods "may only provide temporary relief, especially if current macroeconomic headwinds do not subside."

4. All together, the B3N rated companies have around $80 billion in outstanding debt, up 22% year over year. Health systems on the list include CHS with $11.8 billion debt.

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