The probability of default in most US corporate sectors increased in the first quarter, but the healthcare sector — including senior housing — is forecasting the highest likely default rate, according to a new report from S&P Global Intelligence.
Staff shortages and pandemic fears weighed on the healthcare sector, which has been one of the leading industries with bankruptcies so far in 2022, data from S&P Global Market Intelligence shows.
industry in distress
Looking at trends in bankruptcy filings in Florida, Tampa-based attorney Scott Underwood of Underwood Murray said his firm has definitely seen more issues with housing and caring for seniors — including assisted living, memory care, and some nursing homes — since the pandemic began.
“While healthcare has always been a somewhat volatile industry, it seems like one particular sector has really taken a hit for a while for a variety of reasons, including a large drop in the census,” Underwood said McKnight’s senior life.
Though the industry will naturally bounce back thanks to a growing older adult population, Underwood said the long-term care industry has a “real cash flow problem.”
Underwood — who has represented operators, property owners and creditors — said senior living and care operators appear to face more stress than businesses in other sectors, as reflected by the number of facilities he’s seen in Florida’s court bankruptcies, bankruptcies or contemplated bankruptcies.
“Most of them aren’t unsolvable cases, but they seem to be an area that’s growing,” Underwood said.
A previous Polsinelli-TrBK Distress Indices report by law firm Polsinelli found that senior citizen organizations, independent and assisted living communities, and skilled nursing facilities accounted for a significant portion of healthcare bankruptcy filings in the fourth quarter of 2021.
Underwood said the majority of residential and care communities for elders in need were working on the fringes prior to the pandemic or “maybe struggling a bit but made it work.” The Paycheck Protection Program, Provider Relief Funds and other stimulus programs are “very effective in keeping businesses afloat for a period of time.”
“If you received PPP money to pay employees or rent, and landlords or lenders were cooperative in the early early stages of COVID, you could survive even if you didn’t have cash flow,” Underwood said. “This industry is still struggling to get back on its feet.”
BDO’s 2022 Healthcare CFO survey, which also includes long-term care organizations, found that many healthcare organizations will continue to struggle to meet their bond obligations given the increased cost of supplies, staffing issues and the risk of supply chain disruption.
“The near-term security of access to government funds may have worsened the financial health of many organizations,” said Steven Shill, national director of the BDO Center for Healthcare Excellence & Innovation, in the report.
The BDO survey of 100 healthcare chief financial officers – including executives from the long-term care industry – found that 42% of companies have defaulted on bond or loan obligations in the past 12 months. And 25% said that while they hadn’t yet defaulted, they were worried about defaulting next year.
According to the BDO report, long-term/post-acute care and home health care organizations have struggled the most to meet their debt and/or loan covenants over the past year, with 50% reporting that they have defaulted on debt or loan covenants. The report’s authors noted that these sectors were experiencing “excessive impact” from the pandemic, with long-term care facilities in particular seeing large numbers of residents leaving home and not returning during the pandemic, compounding financial difficulties for providers.
According to the S&P report, the healthcare sector had the highest probability of default at 4.4% — up from 3.3% on Dec. 31. Communications services had the second-highest probability of outage at 3.4% — up from 2.1% in Q4 2021.
Staff shortages and pandemic fears weighed on the healthcare sector, which S&P says has been one of the leading industries with bankruptcies so far in 2022.
The healthcare industry topped the list of the most vulnerable US industries with the highest default probability scores in the first quarter. Healthcare facilities were #1, according to the S&P report, with a 9.15% probability of default (up from 6.2% in Q4 2021).
Underwood said his best advice for any business owner or lender who perceives a problem with an operator is to resolve it through open dialogue as early as possible — and enlist the help of an attorney if the situation is an emergency.
“Far too often companies call us at a point where they are in such dire straits, money has been confiscated from the bank, or cash is so limited [that] they have far [fewer] options as had [had] They contacted us 60 to 90 days prior,” Underwood said. “Even if they hadn’t initiated formal proceedings, they would have been better placed to realistically weigh options if bankruptcy or similar proceedings were required.”