In spite of low rates, hospitals continued to shun debt in 2014, making it the slowest year on record since 2001. Volumes fell 16% amidst prolonged uncertainty about healthcare industry reform and future reimbursement levels.
According to Thomson Reuters, not-for-profit healthcare borrowers (which include hospitals, nursing homes, and CCRC’s) borrowed less last year than any year since 2001.
2014 saw a paltry $24.3 billion in long-term bond offerings, a 16% decline from $28.9 billion in 2013.
The decline is in marked contrast to the rest of municipal sector issuance, which was on par with 2013 with the exception of environmental (-16%) and education (-6%).
2014 turned out to be a gloomy year for healthcare bond underwriters, and lack of supply was only part of the reason.
Underwriters also had to deal with severe restrictions on how they can pitch their services after the SEC Municipal Advisor Rule went into effect on July 1.
Then came the MCDC Initiative requiring underwriters to confess to past disclosure failures by December 1.
Low interest rates are not making any difference to hospitals.
Most refunding opportunities are gone, and hospitals continue to pay down debt and build cash rather than issue “new money” debt in the hope they can better deal with industry uncertainty.
In its latest median report, Moody’s noted that hospitals average days cash on hand has grown steadily in the last 5 years while direct debt has declined; interestingly, average age of plant has been relatively stable, suggesting hospitals are keeping up with at least some capital expenditures.
It’s the major projects that are being canceled or postponed.
The big surprise in 2014 was the unrelenting appetite of commercial lenders for healthcare placements, which are sold to a single investor and do not require the services of bond underwriters.
For the record, private placements across all muni sectors declined from $22.2 billion in 2013 to $19.5 billion in 2014, but anecdotal evidence points to volumes holding up quite well in healthcare in spite of some banks pulling back on final maturities.
Due to low issuance volumes and the resulting supply and demand imbalance, hospitals planning to borrow should know that now is a good time to negotiate underwriting fees, particularly if they can go the bank placement route if underwriters are unwilling to budge.
Wisely, muni experts are steering clear from making projections for this year’s healthcare bond volumes.