Act One: Find partners with whom to establish integrated delivery systems. Act Two: Raise capital to finance system needs.
From a capital markets perspective, the healthcare industry is performing the first act of a two-act play. The relative trickle of tax-exempt debt issues in the third quarter of 1994 is evidence that the drama is just beginning.
In the three months ended Sept. 30, 82 new tax-exempt municipal healthcare bond issues totaling $2.6 billion were sold, according to Securities Data Co., a Newark, N.J.-based financial research firm. In the year-ago period, when a flood of refundings hit the market, 192 issues with principal amounts totaling $6.8 billion went to market.
Volume for the quarter also slowed from the previous three-month period, when 105 bond issues representing $3.1 billion of debt were sold, according to Securities Data.
The 82 new issues for the quarter included 60 new money deals. The rest were either refundings or issues that combined refundings with new financings.
Forty-seven deals totaling $1.4 billion were sold with the aid of some sort of credit enhancement.
J.P. Morgan Securities, New York, topped the list of managing underwriters, with four issues totaling $609.8 million. Vinson & Elkins in Houston, ranked No. 1 among bond counsels, serving as the legal representative on three issues for a total of $733.5 million of debt.
The largest deal of the quarter, by Methodist Hospital in Houston, refunded and consolidated $364.9 million in old tax-exempt debt. The $470 million tax-exempt issue also raised some $54 million in new money for capital improvements.
Through the refunding, Methodist created a master trust indenture that will enable it to borrow capital as part of an obligated group, said Patricia Holmes, a partner in the finance section of Vinson & Elkins, which served as bond counsel on the deal. As hospitals move from being sole providers to members of integrated systems, they're going to need to have credit structures that enable them to issue debt with other members of the network, Ms. Holmes said.
Many other hospitals are expected to follow Methodist's lead as they prepare to form integrated delivery systems.
"I think virtually all the activity now is helping our clients position themselves for the future," said Michael B. Hammond, a principal with Shattuck Hammond Partners in New York. "Ultimately, as new business relationships are established...they're going to have to reorganize their delivery systems, and that will require new capital," he said. That may not happen for another year or two, he added.