Thumb through the official statements of recent healthcare bond sales and you'll stumble upon a partial explanation for the industry's waning appetite for tax-exempt debt.
Increasingly, tax-exempt healthcare providers are financing projects that don't qualify for a federal tax break, such as the construction of medical office buildings and the acquisition of physician practices. Short of dipping into cash, a few hospitals and healthcare systems are turning to taxable debt.
For example, during the third quarter ended Sept. 30, SSM Health Care System issued $135.9 million in debt, including $93.5 million in tax-exempt bonds and $42.4 million in taxable debt. The St. Louis-based system will use the taxable piece to finance its physician and managed-care strategies.
SSM was one of four healthcare issuers to sell new long-term taxable bonds in the third quarter, according to Securities Data Co., a Newark, N.J.-based financial information service. The taxable deals accounted for $60.9 million in debt, a 16% increase from the year-ago period when four taxable issues worth $52.5 million were sold.
Meanwhile, new tax-exempt healthcare bond volume was down about 20% from the year-ago period, according to Securities Data. A total of $2.1 billion in tax-exempt healthcare bonds, representing 70 new issues, was sold during the three months ended Sept. 30. In the year-ago quarter, 77 tax-exempt healthcare issues worth $2.6 billion were offered.
Healthcare issuers' official statements also provide a sampling of the varied financing structures the industry is undertaking.
In Chicago, Northwestern Memorial Hospital's entire $100 million tax-exempt issue, which was sold in early August, represented variable-rate debt. The hospital, which is building a $580 million replacement complex, was one of just seven tax-exempt healthcare issuers that chose to issue variable-rate debt.
By comparison, $1.8 billion of the quarter's $2.1 billion total bond sales represented fixed-rate deals, Securities Data said.
"This gives us the ability to, first of all, have both short-term and long-term outstanding debt (on the balance sheet)," said Gene Principi, Northwestern Memorial's senior vice president of finance and treasurer.
The variable-rate bonds represent a variety of shorter-term maturities, giving the hospital the ability to retire the debt quickly if, for example, longer-term, fixed-rate debt looked more attractive in the future.
Choosing variable-rate debt also reduced the cost of the money, Principi said. The average rate on Northwestern's $100 million in variable-rate bonds is 3.6%. A previous $125 million tax-exempt issue by the hospital, sold in June 1994, carries a fixed rate of 6.33%.
Valley Children's Hospital in Fresno, Calif., sold the largest tax-exempt issue of the third quarter. Proceeds from the $155 million deal, with an average rate of 6.1%, will finance a 205-bed replacement facility in Madera County, nine miles north of its 190-bed hospital. The current facility, built in 1951, is landlocked and outdated, said Dennis Ryan, assistant vice president of financial services. The new hospital is expected to be completed in 1998.