With interest rates hitting new lows, more hospitals are returning to the debt markets. But to the chagrin of investors and bond underwriters, healthcare is borrowing at a much slower pace than other sectors, particularly lower-investment grade hospitals.
In A Nutshell…
- Interest rates recently dipped to new records and credit spreads are shrinking
- Healthcare municipal borrowing is up 30% this year, but other muni sectors are up twice as much
- Highly-rated hospitals and health systems are dominating the debt markets
- Lower-rated hospitals are staying on the sidelines.
Interest rates continue to hit the record books. Two weeks ago, the 30-year MMD index dropped to an all-time low of 2.79%. The MMD has risen about 10 basis points since, but rates continue to remain highly favorable to borrowers.
Credit spreads –the premiums charged by investors on top of an index for taking on a borrower’s credit risk– have also shrunk since the beginning of the year.
Low interest rates and reduced credit spreads should be good news for hospitals looking to minimize their cost of funds.
But the response from providers has been mixed. Year to date, Thomson Reuters reported that healthcare bond issuance totaled $17.4 billion, 30% better than the same period last year. Meanwhile, other municipal sectors were up 60%, led by Public Facilities (+132%), Utilities (+93%), and General Purpose (+71%).
The likely factors behind healthcare’s general lack of appetite for debt include concerns about healthcare reform and future reimbursement levels. While other municipal sectors and corporations are funding new capital projects, healthcare providers are keeping most non-essential projects on hold, which in turn reduces the need to borrow “new money” debt. Also, most hospital bonds with any present value savings have already been refunded so we are seeing fewer healthcare refundings.
Within healthcare, borrowing is impacted by size and bond ratings. Recently, the bond markets have been dominated by highly-rated hospitals and larger health systems. Smaller hospitals and lower-investment grade borrowers are not borrowing as much, in spite of lower credit spreads prevailing across the entire rating spectrum. Some prefer to fund routine capital expenditures with cash on hand, which reduces leverage but negatively affects days cash on hand and puts negative pressure on their bond rating. Others are deferring projects altogether, watching age of plant rise while they try to better determine how reform will affect them.
It may take rates to trend up for a few months before more hospitals return to the debt markets.