Last year, we predicted that hospital bond issuance would finish the year close to 2015 levels, but nowhere near the records seen in 2016. Had it not been for tax reform, we would have been close, so we decided to dust off the crystal ball again and divine hospital bond volumes in 2018.
The numbers are in. In 2017 hospitals and health systems sold $30.3 billion of fixed rate tax exempt bonds, down 12% from 2016. This excludes taxable deals and most private placements and remarketings.
The drop in volumes from 2016 would have likely been much larger if it hadn’t been for the rush to beat the House tax bill deadline. In December 2017 alone, hospitals sold close to $8 billion in bonds, eight times the average volume sold in that month since 2009.
A survey conducted by SIFMA between the initial House and Senate votes shows analysts from seven broker-dealers expecting a 23% median decline.
The survey also predicts a 39% increase in taxable issuance, which doesn’t mean much given taxable bonds represent only 10% of total municipal issuance.
The Bond Buyer reports that in a more recent Municipal Market Data survey, Wall Street analysts are still predicting overall municipal bond volumes will decline from 8% to 34% in 2018.
As usual, analysts are more reserved about forecasting healthcare sector issuance, so we made our own prediction, based on two key assumptions.
Our first assumption is that the frantic December issuance took away $5 billion from what would have belonged in 2018. So “normalized” 2017 issuance is $24 billion instead of $29 billion.
Our second assumption is a big one. We expect that the elimination of advance refundings will not have a significant impact on 2018 volumes because the larger, more sophisticated borrowers will turn to synthetic refunding arrangements to achieve the same economics as an advance refunding, namely forward start cash settle swaps. This may actually be more profitable for bond underwriters given the juicier fees associated with swaps, and it may help revive the moribund municipal swap markets.
With these two major assumptions in mind, we forecast 2018 hospital bond issuance at $24 billion, flat with normalized 2017 and 18% less than actual 2017.