How creditworthy are Swiss hospitals, and what lies ahead for the distressed bond issued by the Zürcher Oberland Health Organization (GZO) Wetzikon Hospital, which has sought provisional debt restructuring? Developments in the hospital bond segment—where outstanding nominal value exceeds 4 billion Swiss francs—were a hot topic at last week's Swiss Bond Congress. The event also covered state and bank solvency, as reported by finews.ch.

The issue's sensitivity was highlighted when the event organizer, Independent Credit View (I-CV), requested media representatives, including a finews.ch editor, to refrain from attending a GZO-specific workshop. This allowed participants, many of whom likely hold GZO and other hospital bonds in their portfolios, to discuss the situation more freely.

Leadership and Organizational Aspects Gain Importance

In a well-attended workshop on public debtors, primarily focusing on hospital debt, Kurt Hess, Senior Credit Analyst, admitted that even I-CV was surprised by the Zurich Cantonal Government’s decision. The public sector's implicit support in this case was overestimated. Hess’ insights carry weight; he is a seasoned figure in the Swiss rating landscape, having rated public debtors for Credit Suisse since the 1990s.

Hess emphasized that without explicit or implicit public support mechanisms and when focusing solely on financial strength (stand-alone rating), hospitals would not qualify for loans. Their financial indicators would be weak, and future prospects would appear unpromising.

Broad Range of Hospital Ratings

Therefore, credit analysis focuses on the likelihood of state intervention in a hospital crisis. However, the complexity of this issue is evident in the varied assessments of the same hospital’s creditworthiness by different analysts, such as those from I-CV, ZKB, or Fedafin. This variance often stems from differing assumptions about the hospital's «systemic importance».

GZO bondholders have already learned that implicit support can fail to materialize in time due to management decisions. Their immediate concern is how to vote at the bondholder’s meeting on October 25.

Bankrupticy Is Politically Difficult to Justify

Marc Meili, Senior Credit Analyst and Partner at I-CV, advises bondholders to support the GZO Creditor Group’s proposal (involving the active Gregor Greber), which includes a three-year extension of the bond’s term and coupon adjustments to incentivize early repayment. Meili argues that «even after approving this proposal, an acceptable restructuring plan for Wetzikon Hospital can still be achieved.» The bondholders currently hold the stronger position because the option of bankruptcy and liquidation is «politically unpalatable».

«Bondholders need to position themselves well for the upcoming negotiations.» However, Meili does not expect the situation to be resolved without some level of debt write-down. While he considers it unnecessary from a purely economic standpoint, politically, it would be difficult to justify burdening taxpayers alone with the cost of restructuring.

Keeping Options Open

It remains to be seen how the restructuring plan, which GZO will present at the creditor meeting, will take shape. However, Meili emphasizes that by approving the bondholder group’s proposals, creditors are not closing off any potential solutions.

On the sidelines of the congress, specualtion arose regarding GZO's plans to resume its halted construction project and whether a private investor could be brought in to support the effort. This is one of the three pillars of the restructuring concept, alongside capital contributions from shareholder municipalities and a debt write-down at the creditors' expense.

An American Real Estate Investor as the Savior?

To recap: GZO had hoped for an injection of capital from a private investor until shortly before its June default. However, negotiations fell through, likely due to deteriorating financial metrics. The name of the candidate has never been revealed, but it is speculated that this investor could be Medical Properties Trust.

This U.S.-based Real Estate Investment Trust (REIT), with a portfolio of $16.2 billion, claims to be the second-largest private investor in hospitals worldwide. Notably, 4.2 percent of its portfolio is already allocated to Switzerland.