On March 4, 2024, Fitch published an exposure draft outlining proposed changes to the rating criteria for U.S. non-profit Life Plan Communities (LPC). Sims bankers had the opportunity to meet with representatives of Fitch to discuss the rationale for the changes and the potential implications when the changes go into effect. The following was created to assist LPC organizations to better understand the proposed changes, the process and the potential impact.
What Are the Primary Changes Being Considered?
Ratings that do not carry a third-party guarantee (e.g., bank or insurance company) will be capped to the ‘A’ category. This same limitation will apply to the key rating drivers (Revenue Defensibility, Operating Risk and Financial Profile).
The Revenue Defensibility assessment for LPCs with a higher number of skilled nursing units compared to independent living units will be further capped at ‘bbb’, indicating these communities are “more vulnerable to revenue pressures” and have “very little pricing flexibility” due to exposure to governmental payors.
A “Size and Scale” sub-assessment will be added within Revenue Defensibility to “better reflect the relative credit strength of single site vs. multi-site LPCs, as well as size and scale by number of units.”
The proposed change which is likely to gain the most attention is the addition to the capital expenditure requirement under the Operating Risk driver and the use of a Capital Plan Risk Matrix, which could result in a negative rating action in advance of the commencement of a new expansion project. This matrix will include both the probability of a large-scale project occurring and the potential magnitude on the credit rating.
When Will the Proposed Changes Be Effective?
Fitch is accepting comments on the exposure draft through April 18, 2024, in email form only and to the following address [email protected]. Please note any comments will be made public by Fitch unless it is clearly stated that they should remain confidential. Sims is compiling comments for submission to Fitch so please contact your banker if you wish your comments to be included with ours.
Fitch expects to finalize and publish the new rating criteria by June 2024. At that time, the new criteria will replace the current criteria published in April 2023.
What’s the Anticipated Impact of the Changes on Credit Ratings?
Fitch anticipates that approximately 10% of the LPC ratings may be impacted by the criteria changes, and most rating changes would be one notch downgrades (e.g., BBB to BBB-).
What Happens if My Organization is Currently Seeking a Credit Rating or if Our Current Rating is Under Review?
During the exposure draft review period Fitch will apply the existing criteria (April 2023) to surveillance of existing ratings and as well as the assignment of new ratings. The exposure draft will not be used to assign any ratings.
What Happens Once the Changes Go into Effect?
Once the criteria changes go into effect, Fitch will publish a Rating Action Commentary with all the ratings that have been placed “Under Criteria Observation”. Fitch states these ratings will be reviewed as soon as practicable, but in all cases within six months.
What Should My Organization Do?
Sims regularly works with credit rating agencies on behalf of our clients. From preparing the information needed for a rating request, analyzing client data compared to industry medians, guiding our clients through the process and participating in annual surveillance calls, our bankers bring years of experience to the relationship. We also have team members who have worked at rating agencies before joining Sims. Please feel free to contact your banker with any questions or concerns. We are here to help.
Additional Information:
“Exposure Draft: U.S. Public Finance Not-for-Profit Life Plan Community Rating Criteria”, Fitch Ratings dated March 4, 2024