With only 3 months to go, 2013 is looking positively sluggish for healthcare bond issuance. This may be bad news for bond underwriters, but low volumes make for favorable market conditions for hospitals with debt offerings in the works.
Through Q3 of 2013, healthcare bond issuance stood at $21 billion. At the current pace, we project year end volumes to register at around $28 billion, barely 4% more than in 2011 — the lowest year of the last decade.
Credit spreads vary directly based on a borrower’s credit quality, but not so much on rates — at least not in the short run– so two bonds in the same credit category that priced on different days will pay different yields, but their credit spreads ought to be close.
But low volumes are good news for hospitals for two reasons.
First, supply and demand plays a large part in setting market yields. In a seller’s market, low supply puts more pressure on mutual funds and other institutional investors to accept lower rates and more permissive terms.
Granted, the lack of hospital paper is not going to have much of an impact on benchmark tax-exempt rates like the MMD (Municipal Market Data) index. But low supply is helping keep credit spreads –the portion of a bond issue’s yield over the MMD—at levels much below where they were just a couple of years ago. With credit spreads representing a third or more of total yield, low spreads really help keep the cost of debt low.
Second, costs of issuance are also under pressure, including fees charged by underwriters (aka underwriter’s discount) and legal fees. Every little bit helps in lower the cost of funds.
Private placements, which include bank direct purchases, are a whole different story. Placements are on track to break new records. Across all muni sectors, placements totaled $12 billion through September. If the pace continues, placements will beat 2012, the highest year of the last decade, by 30%. Clearly, banks are still courting healthcare aggressively.
For most healthcare providers who continue to defer non-essential capital projects –one of the key factors contributing to sluggish volumes–, market conditions are unlikely to make much of a difference.
But for others with approved projects in need of funding, the low volumes spell a favorable environment for keeping borrowing costs low and locking in favorable terms.