Bond markets gods are smiling upon not-for-profit hospitals right now. The tax-exempt MMD benchmark is near its all-time low, and when combined with compressed credit spreads, hospitals can lock in the lowest cost of funds on record.
Hospitals watching the bond markets already know that the benchmark Municipal Market Data (MMD) yield has dropped significantly in recent years.
Started in 1981, the MMD is published every day at 3:00P as a general barometer of tax-exempt interest rates based on institutional trades of $2 million or more.
MMD has had its share of detractors, and was briefly investigated by the SEC in 2012 for potential manipulation, but it remains the benchmark for pricing municipal bonds.
The AAA GO 30 Year MMD has averaged 2.74% since the beginning of 2016, the lowest annual average on record.
Yesterday, the MMD closed within 11 basis points (0.11%) of its 11/28/2012 all-time low of 2.47%.
Chart: The average MMD rate in 2016 is the lowest on record (as of 4/15/2016).
But the icing on the cake for hospitals is low credit spreads.
Credit spread is the premium investors demand on top of the MMD risk-free rate in return for taking on a borrower’s repayment risk.
Credit spreads have compressed since the financial crisis, which has benefited hospitals across the entire credit spectrum.
Chart: Hospital credit spreads have declined since the 2008 financial crisis.
Add compressed credit spreads to the MMD, and hospitals have the recipe for the lowest borrowing cost on record.
Chart: Hospital all-in yields.
All-in rates are so low that many advance refundings are producing solid savings in spite of call dates going out two or more years.
If eligible for an advance refunding, bonds are defeased by funding an escrow to pay debt service until the bonds are actually called on their first call date. Once the escrow is funded, the old bonds are taken off the hospital’s balance sheet and no longer count as part of the hospital’s debt.
In today’s low rate environment, advance refunding escrows earn much less than what is needed for debt service (negative arbitrage). But in many cases, the sizeable coupon savings can more than make up for the escrow costs, and hospitals still achieve attractive savings even with long escrow periods.
While there are many hospitals holding back while waiting for the dust to settle on health care reform and changes in reimbursement, some of the larger providers have already jumped on the opportunity to lock in today’s cost of funds, whether to refinance existing debt, or to fund needed capital projects.
For hospitals and other municipal borrowers, It’s a good time to be the bond markets.