Rising interest rates punished issuers of tax-exempt healthcare bonds during much of 1995. But a rally in the fourth quarter ignited hope for a kinder 1996.
New tax-exempt healthcare bond volume in 1995 ebbed 16% to $11.2 billion, according to Securities Data Co., a Newark, N.J.-based financial services firm. A total of 343 new bond issues were sold during the year. The decline in volume was far less severe than a year earlier, when tax-exempt bond volume plunged more than 50% to $13.3 billion, representing 405 new deals.
Sixty-five percent of total bond volume last year, or 189 deals worth $7.2 billion, carried some sort of credit enhancement, Securities Data reported.
Some 232 deals worth $6.8 billion were sold exclusively to raise new money, and 76 deals totaling $2.4 billion represented refundings. Another 35 deals worth nearly $2 billion combined new financings with refinancings or refundings.
Interest rates were largely responsible for squelching new tax-exempt deals during 1995. For the better part of the year, the rate for 30-year A-rated healthcare bonds fluctuated between 6.5% and 7%. The rates were unattractive, even though they were somewhat less onerous than the previous year, when interest rates of around 6.9% on an A-rated bond were not uncommon and 7.5% interest rates pummeled issuers in the latter part of the year. Insured issues, rated AAA, generally ranged from 6.2% to 6.9% in 1995.
In December, rates on long-term tax-exempt healthcare bonds squeaked in at or below 6%. On Dec. 19, the Federal Reserve's decision to cut short-term interest rates by a quarter of a percentage point, to 5.5%, stoked the bond market rally.
For the three months ended Dec. 31, 1995, tax-exempt healthcare bond volume surged 60% to $3.9 billion, representing 119 issues, compared with 77 deals worth $2.4 billion in the year-ago period.
Some analysts are predicting the 30-year Treasury bond, a benchmark for other rates, may continue to drop another quarter to half a percentage point below 6%. Last year, the long bond finished at 5.9%, down from 7.9% in January.
"Our sense is the rates will continue to be more attractive," said Fred Hessler, managing director of the healthcare group at Smith Barney in New York. He said the more favorable interest-rate environment will create opportunities to refund outstanding fixed-rate debt and take advantage of variable-rate debt.
With 31 deals totaling $1.5 billion, Smith Barney slipped ahead of Merrill Lynch & Co. as top managing underwriter of new municipal healthcare deals in 1995. Smith Barney also led the fourth quarter with 18 deals totaling $926.7 million.
With 11 issues totaling $462.9 million, Orrick, Herrington & Sutcliffe was top bond counsel in the fourth quarter. But Brown & Wood led the year with 19 deals worth nearly $1.2 billion.
Hessler is optimistic about the volume of business in 1996 becuase many of the hospitals and health systems that merged or consolidated in the past year or two are looking to restructure their capital.
"I think it's a very good environment for issuers to think about going out for refinancing or new capital," said James D. Forbes, a director in Merrill Lynch's healthcare finance department. Overall, the firm expects volume to remain "a little bit flat" in 1996, he said.
Forbes expects a number of healthcare organizations to weigh taxable debt or equity financing options this year. He knows of two or three situations in which individual hospitals and groups of hospitals are considering employee stock ownership plans to align the economic incentives of management, physicians and employees.
Not-for-profit hospitals that sell to an ESOP lose access to tax-exempt bonds but gain the flexibility of private ownership. Tax-exempt capital is attractive in terms of interest rates, he allowed, "but it comes with a lot of handcuffs."