Hospitals Hit Troubling Milestone in Most 1Q Defaults Since 2011

Hospitals have hit another unfortunate milestone.

(Bloomberg) — Hospitals have hit another unfortunate milestone.  

In the worst start to the year in more than a decade, bonds of eight hospitals lapsed into impairment — meaning they experienced covenant issues amounting to a technical or monetary default — compared to just one last year, Municipal Market Analytics data show. 

It was the highest first-quarter count of hospital borrowers disclosing a default since 2011, according to MMA’s Matt Fabian and Lisa Washburn. Together with seven retirement homes, hospitals made up almost half of the 33 new impairments in the period, MMA said in a note this week. 

Last year was a historically bad one for hospitals financially as billions in federal pandemic funding waned and costs surged. A resolution in 2023 is unlikely, according to Washburn. 

“Some of the unusual parts about the impairments that we’re seeing is that they are coming from sometimes large, highly-rated systems,” she said in an interview. “That’s actually something that struck us at the beginning of the year when it started to happen because you wouldn’t expect normally to see covenant breaches happening for an A-rated system.” 

For More on Muni Defaults and Distress, See Bloomberg Intelligence Data

That’s due to a combination of negative investment returns last year, federal pandemic money drying up and higher costs, particularly labor, Washburn said. A backup of patients who need to move to nursing homes but can’t because of staff shortages are also a drain on finances, she said. 

“And now add to it that debt costs are higher,” she said. Facilities with variable-rate exposure, especially through bank loans with more-frequent covenant tests, may find refinancing difficult, she said. 

It can also pose a risk for muni investors, Washburn said. “An earlier covenant breach can actually end up having a negative impact on public debtholders that don’t have access to those same remedies at the same time.” 

Competition for patients is also pressuring hospitals, said Chris George, a senior managing director who advises on operations and mergers in the health-care sector for FTI Consulting. “You’re seeing a very slow evolution of care moving to an ambulatory setting.” 

George said he’s also watching growing antitrust scrutiny and the impact of regulations including the new No Surprises billing law, along with a proposed ban on doctors’ non-compete agreements. The latter could send hospitals scrambling to keep adequate staffing, he said. 

There is also a more fundamental problem, he added. 

“A lot of local hospitals, their biggest challenge is access to capital,” George said in an interview. “It’s going to be a tough year this year.” 

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