Moody's: The number of hospitals falling short of credit agreements expected to rise

With the sudden financial hardship—such as sharp declines in revenues and cash flow due to the cancellation of elective procedures because of the COVID-19 pandemic—a greater number of health systems may fall short of agreements tied to their borrowing compared to prior years, according to a recent report.

As Moody's Investors Service analysts explain in a report released this week, more hospitals are likely to experience a "technical default," meaning they have not met required covenants connected to their borrowing agreements such as maintaining certain debt service coverage and days cash on hand.

Technical defaults, which are not payment defaults, post a risk to bondholders if lenders elected to accelerate debt in the face of the default.

Federal stimulus grant distributions will help mitigate breaches of covenants, Moody's analysts said in the report. However, hospitals still face great uncertainty around the rebound and timing of their revenue-generating elective procedures and the impact of a possible second wave of the COVID-19 outbreak.

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Hospitals' revenues have declined by an average of 30% to 40%, Moody's analysts said.

Moody's said most health systems are unlikely to see an impact on their credit quality, depending on whether the breach occurs in conjunction with fundamental operating issues and the steps management takes to avoid breaching the covenant.

"If a hospital returns to being fundamentally sound and the sole factor contributing to the covenant breach is considered temporary, credit quality would not likely change due to the violation," Moody's said in the report.

Health system management may want to consider certain steps to avoid breaching their covenants including understanding what could constitute a breach of their agreement, liquidating investments to recognize realized gains to boost debt service coverage or drawing on lines of credit to temporarily boost cash reserves, Moody's said in the report.