A surge in interest rates sapped the sizzle out of the healthcare bond market during the first quarter of the year.
Tax-exempt healthcare bond volume dipped 6% to $5.1 billion for the three-month period ended March 31, according to Securities Data Co., a Newark, N.J.-based financial services firm. A total of 145 tax-exempt healthcare issues were sold during the quarter.
In the year-ago period, healthcare providers sold a total of 148 tax-exempt deals totaling $5.5 billion, Securities Data said.
The decline in first-quarter 1994 bond volume followed a frenzied year in which healthcare bond volume soared 39% to $28.4 billion because of favorable interest rates.
Healthcare providers that sold bonds during January were able to lock in at low rates averaging 5.25% to 5.5%, said Gordon Howie, a first vice president in PaineWebber's San Francisco office. Seven of the top 10 tax-exempt municipal healthcare deals for the quarter were completed by mid-February, according to Securities Data.
In the past month, however, interest rates have edged up a full percentage point, Mr. Howie said.
Fears of higher interest rates led to a sharp sell-off in municipal bonds earlier this month. The uptick in short-term interest rates forced some investors to pull money out of long-term bond funds, said Edward Malmstrom, managing director and manager of the healthcare finance department at Merrill Lynch.
Many Wall Street watchers believe the volatility in bond prices is temporary.
But if rates go higher, variable-rate financing may become more attractive, Mr. Howie said. In the first quarter of 1994, healthcare providers sold 11 variable-rate issues totaling $291.4 million, compared with seven issues worth $192.4 million in the year-ago quarter, Securities Data said.
In addition, fewer providers are likely to borrow money now to "warehouse" for future needs, Mr. Howie said.
There also will be fewer refundings because of the volume of such deals completed last year, finance experts said. During the first quarter, 70 refundings with principal amounts totaling $2.8 billion were completed. In the year-ago period, 73 refundings totaling $3.2 million were done.
"If 1993 was the year of the refunding, 1994 is likely to be the year of mergers, acquisitions and affiliations," Mr. Howie said.
Joseph Carroll, a partner in the New York law firm of Mudge, Rose, Guthrie, Alexander & Ferdon, said he doesn't see municipal healthcare activity leveling off much. Measured by the stacks of documents on the floor of his office, "it's going to be a pretty busy year," he said.