S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Health Carethe provider is using its own balance sheet to supportpotential variable rate debt tenders.Standard & Poor’s uses capital structure and liquidityratios such as debt to capital, to help evaluatemore thoroughly debt repayment ability and debtcapacity across the rating spectrum. Future capitalneeds and projected sources of capital to fund thoseneeds, whether it is internal cash flow or externaldebt or a combination, remain an important elementof Standard & Poor’s analysis.In addition, an organizations’ overall mix offixed versus variable rate debt is analyzed, bothpre-and post-usage of swaps. Swaps are analyzedfor termination risk, and the potential for largepayments that may then be required. In generalmost health care credits entering into swaps havesufficient liquidity to handle unexpected terminationevents but this could be a problem if an organization’soverall rating profiles deteriorate.Particular attention is paid to whether or not theswaps contain rating triggers that could force termination.Standard & Poor’s has developed criteria(see related criteria) used in reviewing any organizationswith swap exposure and assigns a debt derivativeprofile score as part of the review process.Health Care SystemsStandard & Poor’s definition of a health care systemincludes vertically or horizontally integratedsystems that may have at least three hospitals withsufficient financial dispersion in a single region, aswell as traditional multi-hospital/multi-state systems.The definition also includes systems that havemultiple distinct business lines, even if geographicdispersion is more limited.Over the past decade the number of systems, particularlythose rated in the ‘AA’ category, has risen.System ratings generally are higher than ratings forsingle-site facilities because of the financial andnonfinancial synergies and the dispersion of riskthat generally accrues to systems. This is amplydemonstrated in Standard & Poor’s not-for-profitmedians published annually for systems and standalonefacilities.Standard & Poor’s approach to rating health caresystems is similar to that used for single-site facilities.In both cases, creditworthiness depends on certainqualitative, quantitative, and legal factors.However, a system’s credit standing can beenhanced by geographic, financial, and businessline dispersion. When rating systems, Standard &Poor’s evaluates the extent to which these creditenhancingqualities exist. Key rating considerationsalso include the system’s structure, management’sadministrative philosophy, and overall system levelfinancial track record—which naturally reflects anyeconomies of scale achieved through the consolidationof financial and management resources.The first step in the rating process is to evaluatethe system components that have covenanted torepay the debt issue. In the case of an obligatedgroup legal structure, Standard & Poor’s analyzes theobligated group and its relationship to the system asa whole. The entire financial profile of the system isanalyzed in addition to the obligated group’s profile.If the system employs a corporate-style unsecuredGO pledge, Standard & Poor’s focuses on the creditgroup, if applicable, as well as the entire system.Overall, Standard & Poor’s seeks to understand thesystem’s overall strategic plan, especially as it relatesto growth, operations and financial policy includingfuture capital and funding needs.Obligated GroupThe obligated group might not include all of the entitiesin the system. The initial obligated group oftenexcludes leased and managed facilities, ventures notrelated to health care, and for-profit corporations.Similarly, the group often excludes businesses thatmight diminish the group’s creditworthiness, such asmoney-losing physician businesses.Standard & Poor’s assesses any managementplans that would change the obligated group’sstrength. Potential acquisition, divestiture, anddiversification strategies are particularly important.Plans to divest an important revenue-producingentity or absorb a losing operation can affect theobligated group’s financial strength. Many systemsalso guarantee the debt of weaker institutions, as adiversification strategy or to buoy an affiliatedinstitution in distress. As a result, Standard &Poor’s examines the downside risk of guaranteesand in general fully factors those into the rating,although some credit is given in self-supporting situations.Standard & Poor’s also evaluates potentialtransfers of cash or other assets out of the obligatedgroup. Sheltering assets may be attractive forsome purposes, but often weakens the balancesheet from a credit perspective. Standard & Poor’sasks about any off-balance-sheet activity and willfactor in any contingent liabilities that existwhether they are on the balance sheet or not.Major operating leases for employed physicians,research or administrative space are generally factoredinto the analysis.Finally, Standard & Poor’s reviews the system’sactivity outside the obligated group. Health caresystems often have the opportunity to engage inhealth-related services and alternative deliverysystems, as well as speculative nonhealth-relatedprojects. Although these activities may take placein subsidiaries excluded from the obligated156 Standard & Poor’s Public Finance Criteria 2007