It may not occur to smaller senior living companies to seek a credit rating from a credit rating agency like Fitch Ratings, Standard & Poor’s or Moody’s, but for companies large and small, there are financial benefits said a group of panelists during an online senior living business conference held in March.
“At its core, credit ratings provide transparency and third party verification for investors in this space, which helps to provide greater access to capital to the extent that financings are being undertaken and also provides a more economical or lower cost of that capital, i.e., lower interest rates, better terms and those types of things,” said Nick Gesue, moderator of the online conference, “Make or Break: The True Value of Credit Ratings,” sponsored by publisher Irving Levin Associates. Gesue is chief credit officer at Lancaster Pollard, a firm providing capital to the senior living, healthcare and affordable housing industries.
“Looking at accessing capital,” Gesue continued, “nonrated organizations have much more limited access to capital, and when and if they do access capital as a nonrated organization their cost of that capital can be quite significant.”
Back in 1996 when management at ACTS Retirement Life Communities began thinking about the idea of getting the company a credit rating, it was the economic benefit that motivated managers said Jerry Grant, ACTS’ executive vice president and CFO. Now, those managers are also seeing the ancillary benefits of being rated.
Having a credit rating provides direct economic value to the company, Grant said, but it also provides indirect value because the ratings reassure potential and current customers of the company’s financial health.
“(ACTS’ credit rating) gives us an ability to demonstrate on an ongoing basis our overall financial health,” said Grant. “It provides that consumer with an unbiased evaluation of our organization as we are assembled as a corporation and the financial overall health that stands behind that guarantee (of upholding their continuing care contracts).”
Having a credit rating, said Stephen Infranco, director of public finance at Standard & Poor’s, is a benchmarking and strategic planning tool for companies.
Using a credit rating, a company can benchmark its performance against the performance of competitors or other similar organizations, he said. A company can also track its performance against the industry over time.
As a strategic planning tool, said Infranco, a credit rating can be used for setting financial goals. “We often hear from organizations that they manage to certain metrics for a particular rating level,” he said. “They may look at their operating margins or days cash on hand or leverage or other metrics or a combination of metrics and say that they’re looking to achieve a certain level.”
Having a relationship with a ratings agency also helps companies with their strategic planning, added Gary Sokolow, director, public finance healthcare group at Fitch Ratings.
“The rating agency perspective on what they’re seeing out there and what that might mean stacking up against numbers of other organizations that have those similar service lines, I think, is only helpful to facilities as they sort of think strategically about their marketplace and the broader community and really, nationally, about what’s happening in the industry,” he said.
A senior living company considering a credit rating can work with a financial advisor or investment banker to figure out what its financial benefit would be in relation to the cost of obtaining a credit rating before contacting a credit rating agency, said Gesue.
If a company modeled itself as a BBB rating versus a AAA rating, for example, said Gesue, the interest costs for the BBB rating would be about $200,000 higher for every $10 million borrowed.
“So you can quickly determine, depending on your rating and prevailing interest rates, what the incremental benefit would be,” he said. “I can tell you that the cost of the ratings would be well, well below that, significantly making the argument for getting a rating.”