Recent downgrades affecting Spartanburg (S.C.) Regional Health Services District and West Columbia, S.C.-based Lexington Medical Center are not indicative of a growing trend in rating actions, according to Fitch Ratings.
Fitch downgraded Spartanburg Regional to "BBB" from "A" in June and downgraded Lexington Medical Center to "BB+" from "A+" in July.
In a news release, Fitch said net pension liabilities were considered for the ratings, as the entities participate in the South Carolina Retirement System, a cost-sharing multiemployer plan.
"In determining the level of net pension liability to include in Spartanburg Health's and Lexington Health's leverage profile, Fitch considered state law that applies to funding the statewide multi-employer plan and past state practices to assess whether either issuer's burden was likely to be relieved or reduced through direct state funding," the ratings agency wrote. In the end, the downgrades were based on "extraordinarily large" net pension liabilities.
However, Fitch said it does not consider the downgrades "harbingers of wide-ranging rating actions in the healthcare sector or other sectors." Instead, they said the ratings "highlight outsized pension liabilities under any measure compounded by constraints in the healthcare business model given its more limited revenue defensibility when compared to other sectors in U.S. public finance."
The Fitch release comes about six months after the ratings agency finalized rating criteria changes for U.S. nonprofit hospital and health system revenue debt.
The updated criteria focus more on maintenance of leverage ratios and liquidity "consistent with an issuer's operating profile through the cycle in a forward-looking rating case stress," according to Fitch, which noted net pension liabilities are part of these leverage ratios.
Fitch has predicted about 15 percent of its roughly 300 ratings will be affected over time by the new criteria. So far, among the 138 credits already reviewed under the new criteria, a majority were affirmations. There were also 35 upgrades and 25 downgrades. Fitch points out while the South Carolina entities' downgrades were some of the few multinotch, the majority of rating changes at this point were one notch. Moving forward, Fitch said it does not anticipate criteria revisions alone will affect further rating changes solely for the remaining credits.
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