Not-for-profit healthcare borrowers are enjoying more options to borrow and at better rates.
Prominent health systems, including the Mayo Clinic and Dignity Health, entered the taxable public bond market for the first time in 2012. Taxable markets offered favorable rates compared with tax-exempt bonds—a more common and typically less costly option for not-for-profits, say healthcare finance executives. Taxable debt also lacks the regulation and oversight of tax-exempt deals.
Taxable rates eroded as the year moved to a close, but not before major deals such as Catholic Health Initiative's $1.5 billion taxable bond issuance. “They're building war chests,” says David Cyganowski, a managing director with Kaufman Hall, a healthcare financial advisory firm.
Meanwhile, the benchmark rate for tax-exempt borrowing slid through the year and hit a record low near the end of November, Thomson Reuters data show. The benchmark, the yield for bonds on Thomson Reuters' Municipal Market Data 30-year AAA index, started the year at 3.75% but dropped to a record low of 2.47% in late November.
Interest rates will vary from the benchmark rate, depending on the credit strength of the borrower and the period of time in which the bond must be paid off. A borrower with strong credit will see interest rates closer to the benchmark than borrowers with weaker credit, a difference known as the spread. But as the benchmark dips, rates across the spread can drop as well.
Not only did the benchmark rate drop, but the spread among healthcare borrowers in 2012 narrowed “fairly dramatically,” says Pierre Bogacz, managing director of healthcare financial advisers HFA Partners.
The spread squeeze “clearly favored” lower-rated borrowers, he says. On average, the spread for hospitals at the low end of investment-grade credit (those included in the BBB category) from the benchmark rate dropped 28 basis points from the first six months of the year to the second half of the year through mid-November, HFA Partners data show.
Investors have also been more willing to relax some lending requirements, he says. The more favorable market will likely continue as long as demand from investors continues to outstrip the supply of bond offerings, Bogacz adds.
Healthcare borrowing rebounded from 2011, when bonds issued by healthcare borrowers were at a 10-year low, he says. There are signs that the facility renovations and upgrades that drive healthcare borrowers to the market slowed in recent years, but for some that may have started to shift. Capital spending “remains well below historical norms,” according to a Standard & Poor's overview of stand-alone hospital performance in fiscal 2011. Among health systems, financial measures “have indicated a slight loosening of purse strings after multiple years of conservative capital spending,” according to the credit-rating agency.