The market for tax-exempt healthcare bonds remains favorable, but weaker providers are going to have a tougher time raising capital.
Despite tremendous uncertainty in healthcare, investors will continue to buy hospital bonds, said Glenn Wagner, vice president of municipal research at Morgan Stanley & Co. The law of supply and demand is in healthcare borrowers' favor, he said.
Investors are hungry for all types of municipal securities because such investments provide a shelter from taxes. But there will be fewer tax-exempt investment opportunities this year because so many issuers sold bonds last year to take advantage of lower interest rates. That means healthcare issuers will have less competition for their bonds.
But as the pace of change in healthcare continues, some providers will have more difficulty issuing tax-exempt debt, finance experts said.
"I think the more speculative credit situations will be shut out of the tax-exempt market, even on a private-placement basis," Mr. Wagner said. Marginally investment-grade hospitals will have to pay higher interest rates to attract investors to their bonds, he said. According to Standard & Poor's Corp., 7% of issues rated at the end of 1992 were below investment grade.
Investors may demand credit enhancements, such as bond insurance. Some 58% to 60% of the estimated $20 billion in municipal healthcare bonds that will be issued this year will be insured, said Emmeline Rocha-Sinha, vice president and manager of the healthcare department at Municipal Bond Investors Assurance Corp., an Armonk, N.Y.-based bond insurer. Last year, 58% of the $23.3 billion in municipal healthcare bonds were insured.
"When you have a choice along the same rating category between a healthcare issue and a non-healthcare issue, I think the buyers are being a little more demanding," said Kathleen A. Costine, a senior managing director at Bear Stearns & Co.
Institutional investors "are a lot more thorough in their review" of healthcare bond deals than they used to be, Ms. Costine said. After a recent sale of hospital bonds by Bear Stearns, the largest institutional buyer of the bonds called the hospital to request a meeting with management. Buyers never used to demand face-to-face assurance, Ms. Costine said.
The nation's top bond-rating agencies also are taking a closer look at non-financial factors. A hospital's experience in managed care, its market penetration, medical staff relationships and the quality of its management team now are considered vital pieces of the ratings analysis.
Increasingly, as hospitals move to create integrated delivery systems, they'll need to use some taxable financing, said Ronald Long, senior vice president of finance at St. Mary's Health Network in Reno, Nev. Federal tax law restricts the use of tax-exempt bond proceeds, forcing hospitals to look at taxable options. Although it costs more to issue taxable debt, the long-term benefits to the network make up for it, he said.