Hospitals staged a massive return to the debt markets in 2016 as public bond issuance jumped 87%, more than any other municipal sector. The increase affected all rating categories, including lower investment grade borrowers who had previously stayed on the sidelines.
Last October, we reported that hospital issuance of fixed rate revenue bonds for the first nine months of 2016 had already blown past 2015 volumes and how the full year could set new records.
2016 turned out to be the busiest year for hospitals since HFA started tracking bond issuance. Hospitals sold $34 billion of tax-exempt, fixed rate debt in the public bond markets, almost twice as much as the $18 billion sold in 2015. This figure does not include variable rate bonds, taxable bonds, most private placements, remarketings of existing debt, or tax-supported bonds. From 2009 through 2015, annual hospital issuance has averaged around $16 billion.
Healthcare in general, which includes senior living and other types of providers, saw the largest increase of any sector. According to The Bond Buyer, healthcare issuance was up 48% in 2016, a much larger increase than the 11% reported for total municipal issuance.
Shown above: Fixed-rate, tax-exempt revenue bonds sold by acute care hospitals in the public markets.
2016 activity picked up mid-year and the rally continued in the third and fourth quarter.
What is behind the renewed activity is not entirely clear, as the relationship between interest rates, municipal fund flows, and bond issuance has been a chicken-and-egg debate for years.
The Bond Buyer sees the issuance upswing as a response to the Affordable Care Act as providers borrow to build outpatient facilities. But interest rates may also be a factor. Since hitting an all-time low in July 2016, tax-exempt rates climbed a full percentage point. Some hospitals decided that rates were poised to continue their climb. With projects in need of financing, the prospect of higher rates, and uncertainty about how changes in the ACA may impact future access to the bond markets, some borrowers figured they could no longer wait. Also, refundings were behind much of last year’s volumes and refunding savings can be highly sensitive to rates, particularly for advance refundings. This may have provided another incentive for going to the markets and locking in savings before rates get even higher.
Unlike prior years, the issuance boom extended to lower investment grade providers. Hospitals in the “BBB” category and below borrowed 135% more than in 2015. Providers in the “A” category (which includes A-, A and A+) and “AA” categories borrowed 77% more.
The renewed issuance among “BBB” category providers and those below investment grade (rated below BBB-) is a noticeable departure from prior years when many smaller and mid-sized providers were avoiding the debt markets and paying down debt instead.
It’s too early to try to predict 2017 volumes, but it’s probably safe to say issuance isn’t expected to keep up with last year’s.