"Off-credit" vs. "off-balance sheet": a notable distinction: the distinction between the terms "off-balance sheet" and "off-credit" is crucial in accurately describing a healthcare institution's credit strength to third-party analysts working for rating agencies, credit-enhancement companies , and institutional investors - letter of credit banks and bond insurers - Treasury Management

Healthcare Financial Management, August, 2003 by Kevin T. Ponton

The Off-Credit Concept

Over time, obligated groups began to exercise their ability to divest weak performers. Sometimes those entities were sold outright to another system--truly going off-balance sheet and off-credit from the seller's perspective.

Other weak performers were allowed to remain in their system, but were removed from the obligated group structure (usually losing the support of the obligated group for any debt they might owe). These entities went off-balance sheet from the obligated group's perspective. But by remaining as part of the system--even without the support of the system's obligated group--could they truly be excluded from any analysis of the system's credit strength? No. Could they be considered off-balance sheet for the entire system? No again. How to describe the situation?

Enter the concept of off-credit: The nonobligated members were considered off-balance sheet (from the obligated group's perspective), but they would not be considered off-credit as long as they remained part of the system's overall core mission or ongoing business welfare (for good or ill). If the system were to decide to divest or sell certain assets to an unrelated third party, those assets would then go off-balance sheet and off-credit, from the selling system's perspective. From the buyer's perspective, of course, the assets and any debt incurred to obtain them would go onto both sides of the buyer's balance sheet.

Unless the buyer happened to be Enron, whose accountants used a totally different--most would say extreme--working definition of off-credit.

WHERE PRUDENCE LEAVES OFF AND SHENANIGANS BEGIN

It may be hard to believe, but there was a time when a no-debt policy was considered prudent by hospital boards and managers. Some still stand by the policy to the detriment of the development of their franchise. The CFO of a hospital in the Northeast recently heard his finance committee rail against the first sizeable incurrence of debt in that hospital's 100-year history, even as the facility's infrastructure crumbled and it saw a growing affluent population pass by their outdated ER in favor of a facility 35 miles distant. Hardly could such an atmosphere be conducive to the financial shenanigans of debt avoidance at the base of the Enron debacle. It's arguable whether "avoiding debt" is prudent or stodgy; avoidance of the appearance of debt is where the shenanigans begin.

The following rule of thumb will help distinguish between prudence and shenanigans in your off-balance sheet/off-credit discussions: As long as the subject of your discussion is how to characterize your obligation, keep on talking. But if the subject is how to disguise your obligation, you're skating on Enron's pond.

(a.) The Future of Not-for-Profit Healthcare Capital Financing, Healthcare Finance Forum, June 14, 2002, p. 38.

(b.) The term "off-credit" was mentioned but not defined in Zellner, Wendy, and Arndt, Michael, "The Perfect Sales Pitch: No Debt, No Worries," Business Week "Special Report-The Enron Scandal," January 28, 2002.