By: Alex Kacik with contributions from Eb LeMaster
(Modern Healthcare online)

Merger and acquisition activity is weighing on healthcare companies’ credit ratings, according to a new report.

Fitch Ratings maintained a positive outlook for the industry given the solid underlying demand for healthcare products and services, particularly as the population ages. But it notes there has been an uptick in ratings downgrades as the industry consolidates and companies fund large acquisitions.

The healthcare sector is one of the largest contributors to the increase in total high- grade bond issuance over the past decade, according to Fitch.

The aggregate amount of high-grade bonds (AA- or higher) in healthcare grew at an 18% compound annual growth rate since 2008 to $609 billion as of Sept. 30, rising nearly three-fold since the end of the Great Recession. Healthcare investment-grade bonds with a composite rating in the “BBB” category represent 58% of the total outstanding for the sector compared with 18% at the end of 2009.

While healthcare organizations take on more debt to execute acquisitions that promise better cash flow and efficiencies of scale, those projections are not fully offsetting their growing debt loads, according to Fitch.

“M&A digestion can affect some systems’ aggressiveness—or at least cause a pause—in terms of other future acquisitions and other capital plans,” said Eb LeMaster, a managing director at consulting firm Ponder & Co. who focuses on hospital M&A. “But at the end of the day, good strategy should come before consideration of incremental balance sheet or credit ratings impact.”

Lower credit ratings limit providers’ ability to access capital. If a hospital loses its investment-grade status, which means its credit rating dips below “BBB-” or “Baa3” depending on the ratings agency, certain bond issuers will deem it too risky. It also caps how much the hospital can borrow elsewhere.

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