A good dose of interest-rate relief may help to perk up the sleepy tax-exempt healthcare bond market.
New issue volume nodded off in the first six months of 1995, sinking 39% from the year-ago period.
Some 142 tax-exempt healthcare issues totaling $4.9 billion were sold in the first half of the year, according to Securities Data Co., a Newark, N.J.-based financial information service. That compares with 246 tax-exempt healthcare issues worth $8 billion sold in the year-ago period.
The Federal Reserve's recent lowering of a key interest rate is expected to be followed by other interest-rate reductions in the coming months. Analysts think the rate cuts may lure more healthcare issuers into the market, but they don't expect volume levels to approach the records reached several years ago.
The recent dry spell in the healthcare bond market is a symptom of tax-exempt providers' flagging appetite for huge amounts of debt, observers said.
Instead of investing in bricks and mortar, many healthcare providers are reconfiguring their delivery systems by merging with other providers, adjusting to the shift to managed care and preparing for the impending Medicare budget battle.
"I call it....the triple whammy on healthcare," said Arlan Dohrmann, a vice president with Omaha, Neb.-based Kirkpatrick Pettis, a securities company operated by Mutual of Omaha Insurance Co. Although tax-exempt healthcare activity could pick up, Dohrmann doesn't expect to see the record levels reached in 1992 and 1993.
In the first half of 1992, not-for-profit hospitals sold $9.8 billion in tax-exempt debt, while sales in the first six months of 1993 totaled $8.4 billion.
Tax-exempt bond volume in the three months ended June 30 remained on par with sales in the second quarter of 1994. According to Securities Data, not-for-profit healthcare providers sold 87 issues with principal amounts totaling $3 billion, compared with 92 issues worth $2.8 billion in the year-ago quarter.
Fred Hessler, managing director of the healthcare group at Smith Barney, expects increased volume in the second half as projects that have been under development come to the market.
Sliding interest rates also may entice some tax-exempt healthcare issuers into the bond market in the months ahead, observers said.
On July 6 the Fed cut the federal funds rate-a key indicator of the direction of overall interest rates-to 5.75% from 6%. The federal funds rate is the interest rate banks charge each other for overnight loans to meet reserve requirements.
Interest rates paid on a 30-year AAA-rated healthcare issue have dipped to about 6% from 6.75% at the end of March.
Because of the lower interest-rate environment, "a lot of people now are taking a fresh look at refundings," Hessler said.
In the first half of 1995, 33 issues totaling $1.4 billion, or 28% of total volume, represented refundings. That's down from the first half of 1993, when refundings represented $8.1 billion, or about 57% of total volume.
While the issuance of lower-rate debt to replace bonds with higher interest rates peaked in 1993, the current market, and the possibility of further rate cuts this year, present a new opportunity for providers that missed out last time, Hessler said.