For hospitals with refundings on the shelf, the record-low rates seen last week may be conducive to action. But in today’s volatile rate environment, planning a refunding is not for the faint of heart.
Last Thursday, the bond markets hit a 3-year low when the 30-year Municipal Market Data or MMD index came in at 3.44%. This is nearly a 100 basis point drop since the highs of the budget impasse eight weeks ago.
MMD and credit spread are the two components of hospital tax-exempt bond coupons. MMD will likely continue to fluctuate, but hospitals looking at fixed rate refinancings will find that their estimated savings are suddenly looking a whole lot better, as rate changes of this magnitude can mean millions of dollars in additional debt service savings.
There are two major structural options for hospitals to tap the tax-exempt debt markets: traditional public offering, or bank direct purchase or “DP”. Public bond offerings offer 30-year final maturities. DP final maturities are generally limited to the 7 to 10-year range, but involve lower upfront expenses and credit spreads. For a side-by-side comparison of the two structures, see our recent article The Pros and Cons of Bank Direct Placements.
The downside to any refunding is that in a volatile rate environment, a hospital could spend resources queuing up a refunding, only to see savings evaporate as rates climb prior to day of pricing. For some boards, this can lead to second-guessing. As financial advisors, we generally recommend setting expectations early and passing a parameters resolution to give management the authority to proceed within a specified savings range. This range can be dollars or a percentage savings.
In today’s bond markets, refundings may not be for the faint-hearted, but for hospitals willing to plan appropriately and ride the refunding “roller coaster”, timing hasn’t been this good in years.