In boardrooms and restaurants across America, healthcare administrators are schmoozing with merger and acquisition candidates. How they'll finance their capital needs and consolidate existing debt are issues to be grappled with later.
For many hospitals, this is the time to strategize, not capitalize. As a result, the volume of new tax-exempt municipal healthcare issues sold has slowed considerably.
In the first quarter ended March 31, healthcare bond volume tumbled 63% to $1.9 billion from $5.1 billion in the year-ago period, according to figures provided by Securities Data Co., a Newark, N.J.-based financial information firm.
A mere 45 tax-exempt municipal healthcare issues were sold in the quarter, compared with 145 issues in the first quarter of 1994.
Thirty-eight of the first-quarter deals, representing $1.5 billion in debt, were sold as fixed-rate bonds; the remainder represents variable-rate debt.
Volume also plummeted from the fourth quarter of 1994, when 76 tax-exempt issues worth $2.4 billion were sold.
Lisa C. Vanderbeek, vice president and manager of the national healthcare group at A.G. Edwards and Sons, St. Louis, is starting to see a little more activity and expects capital needs to rise as more mergers and acquisitions are finalized. "There's still a lot of (merger and acquisition) activity that isn't complete," she explained.
David Kaser, a partner in the Detroit office of law firm Miller, Canfield, Paddock and Stone, said the large volume of hospital consolidations and hospital-physician deals continues to consume most of his time. He's also seeing many joint ventures and affiliations that are preludes to mergers.
"That's all I've been doing for three years is mergers and acquisitions," Kaser said. How much time will pass before those merged entities issue debt as newly consolidated, obligated groups is "going to depend on the market," he said.
Interest rates paid on 30-year, A-rated hospital bonds nudged downward during the quarter. According to Cain Brothers & Co., those rates dipped to 6.75% on March 29 from 7.43% on Jan. 3.
Despite the favorable interest-rate environment, some healthcare providers have put refundings on hold. They're afraid to move forward on those issues because they're involved in discussions with other providers regarding mergers and alliances, said Arlan Dohrmann, senior vice president and manager of healthcare finance at George J. Baum & Co., a Kansas City, Mo.-based investment banking firm.
Refunding volume during the first three months of 1995 declined 83% to $467 million involving eight issues from $2.8 billion involving 70 deals during the year-ago quarter.
In addition, federal tax law has prevented some stronger hospitals that have acquired weaker facilities from refunding the weaker hospitals' debt, said Miller, Canfield's Tim Sochocki, a senior principal in the firm's Ann Arbor, Mich., office. Tax law permits only two refundings of bonds issued before 1986.
Having provided legal representation on two tax-exempt healthcare issues with principal amounts totaling $245 million, Miller, Canfield ranked No. 1 among bond counsels for the first quarter. New York-based Goldman, Sachs & Co. topped the list of managing underwriters with seven tax-exempt healthcare issues worth $704 million.