Foundation trust hospitals are likely to be given the lowest investment-grade credit rating - just above high yield or "junk" status - on money they borrow in the City, a leading credit agency warned yesterday.

This means that the hospitals will face higher rates of interest, putting even more stress on their stretched resources.

Standard & Poor's (S&P) has assessed the health sector so that it can advise investors about the risks of buying into private finance initiative (PFI) schemes. S&P argues that the 32 foundation trusts, which operate independently within the National Health Service, face "strong financial pressures" due to growing competition.

"Payment by result, patient choice and more competition from the private sector will increase the variability of revenues, in a context where foundation trusts have little expenditure flexibility due to their high proportion of fixed costs and limited autonomy," says the S&P report.

The agency gives NHS trusts at least an A- investment grade but S&P says that "a small number of foundation trusts might be rated as low as BBB-, the lowest investment-grade rating," it adds.

The report has been written for investors, such as pension funds and banks, which have traditionally bought the index-linked, sterling-denominated bonds issued by PFI hospitals to fund schemes. Individual packages of up to £450m worth of borrowing are being put together to fund the renewal of hospitals such as Manchester Royal Infirmary.

Investment firms such as Innisfree typically form special purpose vehicles to bid for PFI projects. If successful, they invest about 10% of the money as equity and raise 90% by debt. That debt is sold in the capital markets and it is the risk of default on this that S&P has reviewed. In the short term, the credit quality of foundation trusts will differ little from NHS trusts.

But S&P warns that "as foundation trusts demonstrate their ability to generate the necessary cash flow to service debt obligations ... they will be given increased borrowing powers and more operational freedom, and therefore will be more exposed to risk."

Both NHS and foundation trusts already operate in an environment of severe financial pressures, S&P says, exacerbated by the European working-time directive, which cut hours worked but not pay of junior doctors, plus the consultant contract, which also increased staff expenditure.

These factors are contributing to an forecast aggregate deficit of all trusts of £650m in the financial year 2005-06.