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06/01/2023
Q&A: Tips for how healthcare organizations can navigate distress
Q&A responses provided by Art Simonson, and Shayla Higginbotham
Q: Art, why are credit ratings so important to borrowers, and what are the key things companies can do to make sure they are rated fairly?
Art Simonson: Rating agencies and banks have rating scales that denote their view of a borrower’s level of creditworthiness. A public rating from a company such as Moody’s, Standard & Poor’s, and Fitch is important because these firms are viewed as independent entities and the ratings they issue are used by many market participants and lenders to make investment decisions. There is a direct correlation between rating levels and the cost of debt, and, therefore, it is critical for companies to make sure the ratings assigned by rating agencies and banks fairly represent their true level of creditworthiness. A credit rating, however, is just an opinion of creditworthiness based on several factors and variables within a prescribed criteria structure. This introduces a large human element which has biases, preconceptions, and built-in conservatism that can lead to an assigned rating below a company’s actual likelihood of default. Communication and knowledge of the rating process are the keys to helping ensure a company’s credit risk is accurately perceived by banks and rating agencies. When meeting with rating agencies and banks, it is critical for company management to focus on the attributes and strengths that are the important components of the ultimate rating decision. Insight and understanding of how the rating process works and how to best position your company in front of the agencies and banks are crucial to obtaining an optimal rating. We have dedicated rating and debt advisory personnel to help clients manage both an initial rating and their long-term relationship with rating agencies and lending institutions.
Q: Shayla, what are the most common ways that healthcare organizations are using debt to fund expansion efforts?
Shayla Higginbotham: Due to a shift from inpatient to outpatient services, coupled with lowered reimbursement rates and cash flow crunches, healthcare providers are placed in situations where they must strategically plan growth opportunities and diversify their funding sources. In order to thrive in the post-pandemic era, healthcare providers must understand not only the cost of care in particular environments but also the cost of capital in specific expansions. The provider type is key in anticipating and predicting the capital expansion strategies that will demand debt financing. Hospitals and health systems are investing in telehealth solutions for expanded access, infrastructure for safer patient environments, and acquisitions for an extended continuum of care. Medical groups are building new offices, purchasing high-end equipment, and partnering with similar and different practices to combine forces in an attempt to provide the highest quality of care to the largest patient population. Ambulatory surgery centers (ASCs) are choosing to refinance to lower payments, generate additional working capital for data-sharing expansions, and position themselves more competitively.
While the provider type may alter the investment category, all healthcare providers are seeking ways to increase market share, enhance revenues, and survive in an ever-changing healthcare industry. The challenge, though, with these strategies is that rising labor costs and interest rates will continue to hinder the previous go-to debt financing options. Therefore, healthcare providers must complete the appropriate due diligence to fully understand their cost of care and cost of capital, when making expansion decisions.
Subject matter expertise
Shayla Higginbotham
Principal, Healthcare Advisory Leader
Arthur Simonson
Managing Director, Project Finance and Consulting
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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.