SNWAM continues to overweight the not-for-profit hospital sector because credit quality continues to improve, supply is stable and spreads continue to look attractive relative to the overall municipal market. Over the last two years, the implementation of the Affordable Care Act (ACA) drove above average revenue growth due to increased patient volumes and reduced bad debt expenses. The ACA is now a fading tailwind in the hospital sector. For states that implemented the ACA, these factors led to, in general, improved credit conditions. Now the hospital sector is entering the second phase of the ACA, which has introduced some downside risks, mainly involving the implementation and execution of strategies to capture increased patient volumes. One such strategy to capture economies of scale and efficiency will be more merger and acquisition activity. Overall, the sector is well positioned for greater M&A activity due to balance sheet measures. One such measure is the increase of the sector’s average maximum annual debt coverage (MADS) ratio to 4.25x in 2015 from 2.75x in 2010 according to CreditScope. Finally, there is a positive underlying secular trend in the form of an aging U.S. population, which will drive demand for services and increase healthcare spending by federal, state and local governments. These secular trends will anchor the sector for the foreseeable future.
Sources: SNWAM Research and Investor Tools CreditScope