Approximately 40% of rated jointly supported variable-rate demand obligations (VRDOs) would be downgraded following a one-notch downgrade of the bond obligor. U.S. municipalities are the primary issuers of jointly supported VRDOs, with not-for-profit health care and transportation representing approximately 57% of rated issuance. Although most U.S. public finance ratings have stable sector views, S&P Global Ratings' 2024 sector view of the health care industry is negative due to high labor and operating costs. Health care accounted for 36% of outstanding jointly supported VRDOs as of April 2024.
What's Happening
We made 13 downgrades and three upgrades in the health care sector in the first quarter of 2024. We also revised our outlook on eight ratings to positive and on four ratings to negative. For reference, 24% of our health care rating outlooks were negative as of December 2023.
Why It Matters
Our ratings on jointly supported VRDOs are potentially at a higher risk of rating volatility, given the VRDOs' relatively larger exposure to the health care sector. If one party is downgraded, the jointly rated obligation may be downgraded as a result.
Jointly supported obligations have two or more supporting parties that are contractually committed to irrevocably provide full and timely payments on the obligation. In addition, the correlation level may provide further rating sensitivity following a downgrade of a supporting party. This is particularly important for U.S. health care systems that operate in multiple states, which may lead to a higher correlation assessment.
In general, additional notches of stress are more likely to lead to us to lower our rating on the jointly supported VRDO. However, there are instances where the long-term rating on a bond obligor is too low to provide uplift to the jointly supported rating, despite a joint application on the VRDO. In this scenario, even a three-notch downgrade of the bond obligor would not impact the jointly supported rating.
There are 15 financial institutions that provide credit-enhancement to the jointly supported health care VRDOs. These banks predominantly have issuer credit ratings in the 'A' category with stable outlooks. Toronto Dominion Bank is the largest provider, with a market share of approximately 25% of jointly supported health care VRDOs.
What Comes Next
We will continue to closely monitor the U.S. banking sector over the next few months as it relates to jointly supported VRDOs, given the impact of falling prices on commercial real estate. Our rating outlook on most U.S. banks are currently stable and expected to remain that way through the challenges ahead this year.
Related Research
- U.S. Not-For-Profit Health Care Rating Actions, March 2024, April 15, 2024
- Some U.S. Regional Banks Could Face Higher Risk If Commercial Real Estate Asset Quality Worsens, March 26, 2024
- U.S. Not-For-Profit Acute Health Care Rating Actions, 2023 Year-End Review, Feb. 8, 2024
- U.S. Not-For-Profit Acute Health Care Providers 2024 Outlook: Historical Peak Of Negative Outlooks Signals Ongoing Challenges, Dec. 6, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Joshua C Saunders, Chicago + 1 (312) 233 7059; joshua.saunders@spglobal.com |
| Secondary Contact: | Alexander J Gombach, New York + 1 (212) 438 2882; alexander.gombach@spglobal.com |
| Research Assistants: | Liam Felter, Englewood |
| Sophia Frohna, Chicago |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.