Even with rates below historical averages, hospitals aren’t borrowing. Last quarter healthcare bond issuance is down 50% from prior year. Like households, hospitals are cutting back on big ticket purchases, paying down debt, and hoarding cash.

Hospitals and other healthcare municipal borrowers issued a piddling $3.2 billion in bonds through the first 3 months of 2014 compared to $6.3 billion in 2013.

The bar for healthcare bonds was already low in 2013, the second slowest year of the last decade.


The sluggish volumes have affected all muni sectors, but healthcare is an extreme case. Other sectors issued $62.5 billion in the first quarter, down 26% from 2013.

Low volumes are taking their toll on healthcare bond underwriters and rating agencies.

Underwriters specialized in healthcare bonds have been hit the hardest by sluggish issuance and the shift to bank direct placements, where their services are not needed. To add insult to injury, underwriters are being gagged by regulators concerned about rampant conflicts of interest.

Rating agencies are also feeling the squeeze, but unlike underwriters, their revenues are largely based on annual surveillance fees, so they don’t depend as much on the next bond deal.

Interest rates can’t be blamed for why hospitals aren’t borrowing: the 30-year MMD tax-exempt benchmark index is still 40 basis points below the 5-year average of 3.91%.

Hospitals aren’t using cash either: median days’ cash on hand have improved each year since 2009 even as operating expenses rose for many healthcare providers.

The simple truth is that hospitals are avoiding big capital spending, preferring to build cash and pay down debt instead.

Last year, Moody’s concluded that while highly-rated hospitals are still borrowing to preserve liquidity, lower-rated hospitals, those with less debt capacity, are holding off on large capital projects as patient volumes are moving to ambulatory settings.

Just like consumers who cut back on big ticket items, hospitals are putting capital projects on hold, repaying existing debt, and building cash.

Which isn’t a bad way to start the year.