Hospital Bond Defaults Create Opportunities for Healthcare Debt Buyers

Over the last 37 years, 17 of the not-for-profit hospitals that Moody’s rated have defaulted on their bonds, including seven since 2000. A December report by the ratings company says more defaults are likely in the coming decade if some industry players don’t get a better handle on operating losses and employ better oversight of management’s strategy.

“Growing challenges in the healthcare industry, including rising capital investment and potential Medicare reimbursement cuts, may accelerate future defaults,” according to the report, “Anatomy of a Not-for-Profit Hospital Bond Default.”

Of the estimated 4,900 hospitals in the U.S., Moody’s rates 550 hospital groups, representing about 1,200 hospitals. Currently, 50 to 55 of the hospitals are currently rated below investment grade, said Lisa Goldstein, senior vice president and team manager of Moody’s healthcare ratings team.

Goldstein doesn’t believe any of those hospitals may default. But she said hospitals that had defaulted were below investment grade. Meanwhile, the industry has suffered more defaults by hospitals not rated by Moody’s.

Experts say a bond default could cause some hospitals to go out of business, though many would continue to operate independently or through a merger. In any case, a bond default or the prospect of one will have little impact on collection agencies if the hospital is still operating, said John Moroz, director of healthcare business development for CarVal Investors.

“The hospital still has patients coming in. They are generating revenue and there are still invoices that have to be collected,” Moroz told insideARM.com.

A hospital in default, or facing default, needs cash and is assessing its options, giving healthcare debt buyers an opportunity, he said. “They will be more receptive to talking about opportunities to raise cash,” Moroz said. “If that means selling receivables, it opens the door to that conversation.”

Moroz said hospitals in bond default may consider selling fresh paper or more receivables than they previously would have. Because receivables management likely played a minor role, if any, in the bond default, the debt buyer should be able to collect on the paper, Moroz said. However, he recommends that buyers learn why a hospital defaulted on the bond.

“By talking to the CFO and looking at financial statements you can get a pretty good picture of what the issue is.”

CarVal Investors, a subsidiary of food and agricultural powerhouse Cargill, is an asset management company based in Minnetonka, Minn.