A
proposed accounting rule
would flip certain debt from non-current to current, and some hospital
leaders say the change—affecting tens of millions of dollars in some
cases—could throw their debt ratios out of whack.
The Financial Accounting Standards Board says the proposed
standard, Topic 470, is meant to simplify debt classification on balance
sheets, and comes after stakeholders complained the current method is
unnecessarily complex. In essence, the rule would replace current
guidance with uniform principles for determining debt classification,
according to a FASB explainer.
Under the proposal, a letter of credit
could no longer be used to classify a type of bond called a variable
rate debt obligation as current. Today, VRDOs can be treated as
long-term obligations so long as they’re remarketed, or have long-term
LOCs.
“People look at your company different when
you all of a sudden have an extra $75 million in short-term liability,”
said Jared Grant, senior director of financial reporting for St. Luke’s
Health System in Boise, Idaho.
About $75 million of the $900 million in debt offerings St.
Luke’s reissued last year were VRDOs backed by LOCs, Grant said. That
debt is classified as non-current on the health system’s balance sheet.
Grant has not calculated what the change would do to St. Luke’s debt
ratio, but he thinks it would be significant. He’s worried it could even
have a negative effect on St. Luke’s bond ratings.
“It’s a large chunk,” he said. “If that went to current treatment all of a sudden, that would be a large shift.”
VRDOs backed by LOCs make sense for some health systems
because they allow them to obtain financing at attractive rates, said
Norman Mosrie, a partner with DHG Healthcare and chair of the Healthcare
Financial Management Association’s principles and practices board.
Some of the VRDOs on today’s balance sheets are legacy
deals. The method lost popularity in recent years as borrowers turned to
fixed rate bonds to lock in low interest rates, he said. Back in 2014,
the VRDO market was worth $222 billion, according to the
Municipal Securities Rulemaking Board.
“This has been an important financing mechanism for health systems over the years,” Mosrie said.
Mosrie expressed concern over whether bondholders would
accommodate potential negative impacts to bond covenants under the
proposed rule, or whether credit rating agencies would move to downgrade
based on the large amount of debt classified as current.
Rating agency representatives, however, said they would not
hold it against a company’s rating. At S&P Global Ratings, analysts’
practice is already to classify VRDOs as long-term debt even if they’re
listed as current on balance sheets, said Kenneth Gacka, a senior
director and analytical manager in S&P’s not-for-profit healthcare
division.
“I don’t think it will affect anything in terms of the
presentation of our ratios, because we already make that adjustment
whenever it is present,” he said.
Similarly, Kevin Holloran, a senior director with Fitch
Ratings, wrote in an email that his agency would also consider that a
long-term obligation. That said, a casual reader could potentially be
misled, he said.
Mosrie hopes the FASB, a not-for-profit organization that
sets standards companies must abide by if they follow generally accepted
accounting principles, continues to allow long-term LOCs linked to debt
financing transactions be classified as non-current. The FASB is
accepting comments on
the rule until Oct. 28. This proposal is an updated version of an
earlier proposed rule released in 2017. The new version is based on
substantial feedback.
FASB spokeswoman Christine Klimek wrote in an email that
consistent with the goal of simplifying guidance, the board proposed
precluding consideration of unused, long-term financing arrangements to
provide financial statement users with more consistent and transparent
information about the contractual maturities of debt arrangements.
If the rule ultimately does take effect, Rick Kes, a partner
and healthcare industry senior analyst with RSM, said he thinks health
systems with this type of debt will renegotiate it and change the terms.
“I think most health systems that can do it would rather not
have current debt on their balance sheet if they can avoid it,” he
said.
That’s what Doug Coffman, chief financial officer of West
Virginia United Health System, said would likely be his course of
action. Otherwise, his 10-hospital health system with
more than $2 billion in annual revenue would
see its debt ratio drop from about 2.5%, well above its peer group, to
about 2%, right in the middle of the pack. Almost $80 million of WVU
Medicine’s $1.3 billion in outstanding debt obligations is VRDOs,
Coffman said.
Coffman thinks the potential effects of the change extend
beyond health systems, and could hit the banks that issue LOCs and bond
underwriters if the VRDO market becomes less attractive.
“I’m not sure that FASB fully grasped that possible impact as they drafted this, but maybe they did,” he said.
WVU Medicine chose VRDOs for two reasons: interest rate
diversification and some of the system’s fixed rate swap agreements
require that it have some variable rate debt, Coffman said.
When St. Luke’s was going over its financing options,
investment bankers presented VRDOs backed by LOCs as one of multiple
long-term debt vehicles, Grant said. The health system chose it as one
of the five vehicles it used, in part to diversify and because the price
was competitive.
If the proposed rule takes effect, Grant said St. Luke’s will consider getting out of VRDOs.
“I think eventually it would poison this vehicle a little
bit from health systems on wanting to ever really even touch it if this
was the guidance,” he said.
https://www.modernhealthcare.com/providers/proposed-accounting-rule-could-shift-millions-hospitals-current-debt
