Interest expense will rise 20% for most low-rated healthcare companies in 2023, Moody's says
Moody's released the report prior to the Feds raising the interest rate by a quarter point yesterday.
Photo: Hisham Ibrahim/Getty Images
Interest expense will rise 20% for most low-rated healthcare companies in 2023, and the metrics would further weaken, if rates continue to rise, according to a new report by Moody's Investors Service.
Moody's released the report prior to the Federal Reserve raising the interest rate by a quarter point yesterday. The report covers the time frame beginning in 2022, through the last increase in February 2023.
The report looked at 47 healthcare companies in the United States and Canada rated B2 or lower with at least $1 billion of outstanding debt.
WHY THIS MATTERS
Interest expense and cash flows will meaningfully weaken for most low-rated healthcare companies throughout 2023, Moody's said.
"We believe that interest rate hikes that have already occurred will have a larger impact on the 47 companies in our sample …" Moody's said. "The effects of prior rate increases will be felt with each sequential quarter of earnings throughout 2023. Still, any future rate hikes would also have an impact."
Interest expense as percentage of debt will materially increase in 2023. Aggregate interest expense for 47 U.S. healthcare issuers rated B2 or below, with at least $1 billion of outstanding debt, will increase 21%, to 7.7% of total debt by the end of 2023.
Median free cash flow to debt and interest coverage for these 47 companies will fall, the report said.
"We believe roughly 60% of the companies in our sample have some protection against rising interest rates through hedging," the Moody's report said. "However, the benefit of these hedges will amount to a modest 5.7% of aggregate total interest expense this year for our set of 47 healthcare issuers."
THE LARGER TREND
The Federal Reserve approved the ninth consecutive rate increase but signaled that banking-system turmoil might end its rate-rise campaign sooner than seemed likely two weeks ago, according to The Wall Street Journal.
The Feds have increased the federal funds rate by 450 basis points since it started tightening its monetary policy in March 2022 in a bid to curb inflation, Moody' said.
ON THE RECORD
"Healthcare companies at the lower end of the rating scale have been hurt by several major trends over the last year, including labor shortages, wage pressures and supply chain issues, resulting in considerably weaker performance," Moody's said. "These developments have left many low-rated healthcare companies particularly exposed to rising interest rates, with many lacking a cushion in their credit metrics to withstand the higher interest expense compared to just two years ago."
Twitter: @SusanJMorse
Email the writer: SMorse@himss.org
Dr. Vin Gupta will offer more detail during his HIMSS23 session "Keynote: Healthcare Disruption: Accelerated Opportunities for Care Delivery Alternatives." It is scheduled for Wednesday, April 19, at 8:30 a.m. - 9:30 a.m. CT at the West Building, Level 3, in the Skyline Ballroom, room W375.
