3 The subsequent pressure on healthcare operating margins and erosion of cash reserves has led to an increase in credit rating downgrades across the hospital sector and an uptick in nursing home defaults. Separately, nursing home occupancy percentages have yet to rebound to their pre-pandemic levels of 92%, having plateaued around 86%. While hospitals have started to see some price pressures ease, labor costs remain elevated compared to long-run levels. We see some attractive opportunities in the healthcare sector, which has managed higher-than-normal operating expenditures stemming from pandemic-related staff shortages and, more recently, rising inflation. It’s important, in our view, to focus on fundamental research to identify the most compelling potential opportunities, and that’s particularly important today given a fluid economic backdrop. Still, we believe defaults will remain manageable in the short run and generally isolated to the project finance sector, which includes a variety of highly speculative, unique credits such as mega-malls, waste-to-energy facilities, and start-up sports complexes. One-off distressed scenarios are possible with individual issuers given the rise in highly leveraged deals that was stimulated by historically low interest rates. In the $4 trillion municipal bond market, first-time defaults this year are just over $ 1 billion. We expect near-term credit ratings stability even in the face of inflationary headwinds.Īdditionally, first-time municipal bond defaults are well off their 2020 peak and are tracking down nearly 40% as measured by par through the first ten months of 2022 on a year-over-year basis. Even if projected budget gaps are fully realized this fiscal year, state reserves as a percentage of expenditures will be at their highest levels in more than at least 20 years. 1 Those increases, along with the federal government’s $350 billion Coronavirus State and Local Fiscal Recovery Funds program (2020), have led to record cash reserves for many states and localities. After increasing by more than 16% and 11%, respectively, in 2021, income and sales taxes have grown by another 18% and 12% in first half of 2022. More than Income: Credit Health Looks Attractive, Defaults Are Downīeyond income potential, we believe municipal credit remains strong thanks in part to continued solid growth of state and local taxes.
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