"In today's rising median environment, hospitals that want to improve their bond ratings must show they are trending favorably when compared to their peer group."
Fitch Ratings, Moody's Investors Service and Standard & Poor's Ratings Services recently released their 2014 nonprofit hospital median financial ratios, and medians for key ratios continued to improve in 2014, raising the bar for hospitals across the rating spectrum, according to a report by HFA Partners.
Although the median reports track a number of ratios, a large portion of the quantitative analysis focuses on four so-called key ratios. According to HFA Partners, the following key ratios can explain nearly half of a hospital's overall bond rating.
1. Days cash on hand measures a hospital's ability to meet operating expenses from cash on hand, and DCOH medians have improved steadily over the last several years. "Rating agencies don't like to admit it, but DCOH is the most important of all financial ratios," according to HFA Partners. Various factors have led to the improvement in DCOH medians, including strong investment returns and lower capital spending, according to Fitch.
2. Cash to debt is the ratio of unrestricted cash and investments to long-term debt. This ratio measures the ability to pay off debt with unrestricted reserves. Like DCOH medians, cash-to-debt medians have also improved in recent years. The medians improved as "providers hoarded cash while at the same time avoiding leverage," according to the report.
3. Maximum annual debt coverage measures a hospital's ability to meet its highest projected annual debt service from net income available for debt service. "Mostly flat in prior years, MADS coverage went up in 2014, particularly in the 'A' and above rating categories,'" according to the report. Moody's attributes the improvement to a combination of revenue growth, investment returns, refunding savings and profitability improvements.
4. Debt to capitalization measures leverage, and leverage has declined in recent years, according to HFA Partners. S&P attributes the decline to lighter capital spending and debt issuance. "Impressive investment returns for those hospitals who invested in the stock market has also contributed to better measures," according to the report.
The HFA Partners' report points out that medians can vary significantly between standalone providers and health systems. The median reports from Fitch and Moody's do not break out standalone providers from health systems, but S&P does publish separate medians for each.
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