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Moody’s: Coronavirus stimulus will less economic pain, but credit climate will remain difficult

The $2.3 trillion CARES Act follows other fiscal and monetary measures that the U.S. government...

The $2.3 trillion CARES Act follows other fiscal and monetary measures that the U.S. government has taken to address the COVID-19 coronavirus crisis and the resulting economic fallout. While the federal aid package will provide some relief to households, businesses, states and local governments, Moody’s Investors Service expects credit conditions will likely remain difficult for many public and private debt issuers over the coming months.

Combined with other fiscal and regulatory actions, the rescue package should help to contain some of the economic damage and help with recovery once the pandemic is under control, the report found. But because the shock is so profound, it won’t be enough to prevent a serious recession or widespread unemployment.

WHAT’S THE IMPACT?

State and local governments will continue to experience budgetary strains, despite additional funding, the report found. Meanwhile, support for the healthcare sector will provide only modest relief for hospitals under strain. The CARES Act allocates $100 billion to support hospitals’ operations and help them access critical supplies. Yet the funding is unlikely to fully compensate providers for the material decline in revenue caused by the cancellation in elective surgeries and the cost of labor and protective equipment needed to treat coronavirus patients.

Other measures included in the stimulus package, in particular advances on future Medicare reimbursements, will likely provide liquidity relief to hospitals over the next several weeks. While the timing of these payments will vary based on when hospitals submit applications, the Centers for Medicare and Medicaid Services has said it will review requests within seven days of receipt, which Moody’s expects will expedite the disbursement of funds. The measure also builds on an existing program, which will likely facilitate implementation.

Larger systems that have regional diversification and strong absolute and relative liquidity will be better able to weather the pandemic. Many larger systems have access to capital in the form of bank lines or revolvers, while others have quickly established new bank lines of credit.

The CARES Act is mainly targeted at hospitals, and many rated healthcare companies will not be direct recipients of the aid because they’re not paid by government payers. Instead, they’re paid directly by consumers, hospitals, pharmacies, laboratories or other customers who may delay payments in order to preserve liquidity. For these companies, liquidity may still be a concern.

WHAT ELSE YOU SHOULD KNOW

Creditworthy borrowers in nationally important sectors – and large employers as well – will likely benefit the most from the CARES Act’s provisions for large companies. But these measures are unlikely to prevent irreversible credit deterioration and, in many cases, outright default for smaller, weaker companies with speculative-grade ratings.

For financial institutions and structured finance transactions, the CARES Act will mitigate a rapid deterioration in asset quality to the extent that support measures help households and businesses meet their financial obligations. Provisions that allow borrowers to defer payments on certain types of debt may also support asset performance in the short term but create longer-term risks for creditors.

The effectiveness of government support will depend greatly on how quickly the aid is disbursed and whether it’s sufficient to prevent a major hit to vulnerable households and to businesses’ financial stability.

Low- and middle-income households, as well as SMEs, tend to have little financial cushion and are particularly vulnerable to even a temporary loss in income. Even with the stimulus measures included in the CARES Act, many businesses will likely struggle to survive with little or no revenue for an extended period.

THE LARGER TREND

The financial outlook for the nonprofit public healthcare sector in the U.S. has changed from stable to negative, primarily because of the effects of the pandemic, Moody’s found last month.

The sector will likely see lower cash flow compared to 2019, although it’s difficult to estimate a specific range due to the rapid and unpredictable nature of the outbreak. Revenue will likely decline as an increasing number of hospitals cancel more profitable elective surgeries or procedures and halt other services in preparation for a surge in coronavirus cases.

At the same time, expenses will rise, with higher staffing costs and the need for supplies such as personal protective equipment. Moody’s is assuming that the outbreak will be somewhat contained by the second half of this year, with the economy gradually recovering by that point. But because there’s such a high level of uncertainty, the risk of a more severe economic impact is elevated.
 

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