Amidst continued industry uncertainty, hospitals held back on new debt in 2013. Overall bond issuance fell 25% from 2012 and barely ahead of 2011 volumes, making 2013 the second slowest year of the decade. Bank placements broke new records.

Healthcare borrowers sold a meager $27.9 billion in bond offerings in 2013, compared to $37.3 billion in 2012 and $26.8 billion in 2011.

Of all municipal sectors, the decline in healthcare volume was only second to utilities, which sold 30% fewer bonds than in 2012. Overall, municipal bond issuance fell 13% from 2012.

Low interest rates didn’t seem to matter much to hospitals trying to deal with the uncertainty of healthcare reform.

Rather than borrowing to fund capital projects, many hospitals chose instead to pay down existing debt or build cash on hand. Rating agency medians for 2013 won’t be available until August 2014, but prior years show hospital liquidity is steadily rising.

Banks are not complaining. Whatever little borrowing hospitals did last year, a large chunk was placed directly to banks. Private placements across all municipal sectors soared to $19.1 billion in 2013.

The huge leap in direct placements in 2013 surprised many market observers who were predicting an impending bank indigestion. Our own projections for placements in 2013 were $15 billion, see Bank Placements Still Hot With Hospitals.

For banks, placements mean an opportunity to get a hospital’s depository accounts and lucrative fee business.

For hospitals, tax-exempt placements offer a lower overall cost of debt and more flexibility, but shorter maturities make placements better suited for projects such as information systems where useful lives rarely exceed ten years.

So far, the limited supply of hospital bonds in the public markets has not lowered the cost of debt, at least not for borrowers in BBB category, where hospital credit spreads have risen in the last six months.

The prognosis for 2014 is bleak. Bond dealers expect it to be the second worst year for muni issuance in a decade, with some predicting the lowest volume since 2000 as Fed tapering pushes interest rates higher and makes refundings less attractive.