When consolidation opportunities crop up in Houston, Memorial Hospital System will be ready to grab them.
In February, Memorial issued $268.3 million of fixed-rate, tax-exempt bonds and another $107 million of variable-rate debt under a new master trust indenture, which gives the nine-hospital system far more flexibility to merge and transfer funds than its old legal covenants allowed.
Although nothing has been firmed up, Memorial officials have discussed combining not-for-profit operations with other healthcare executives around town, says John Gay, the system's senior vice president of finance. "I guess the theory is where there's smoke there's fire," he says. "We wanted to be prepared."
By refinancing now, Memorial rids itself of restrictive legal covenants that could impede consolidation efforts later. It's one of the factors fueling an otherwise tepid tax-exempt bond market.
According to Securities Data Co., a Newark, N.J.-based financial services firm, 61 tax-exempt healthcare issues worth a little more than $3.3 billion of new debt were sold in the first three months of 1997. That's down about 10% from the first quarter of 1996, when 86 issues with principal amounts totaling $3.7 billion were sold, according to Securities Data.
Some 45 issues worth $2.3 billion-more than two-thirds of the debt issued in the quarter-carried fixed interest rates. Twenty-eight bond issues worth $1.7 billion were insured.
By contrast, 82 fixed-rate healthcare deals worth just under $3.7 billion and 41 insured deals worth $2.1 billion were completed in the first quarter of 1996.
Just over half the $3.3 billion of debt issued in this year's first quarter paid for new healthcare projects, with the balance earmarked for refundings of existing debt or some combination of refundings and new financings. Analysts say the bulk of the new money continues to fund ambulatory-care and modernization projects.
With little new money flowing into new acute-care construction, most of the excitement in the tax-exempt healthcare bond market revolves around the structure of the deals themselves.
Advocate Health Care Network's $221.7 million sale of variable-rate refunding bonds, among the largest offerings of the quarter, is a good example.
With its January offering and a $165.6 million fixed-rate series offered in December, Advocate adopted a new legal structure that gives the Chicago-area system more latitude to manage its corporate assets. But the so-called "restricted affiliate" or "corporate" structure is drawing some fire from credit analysts and investors who say it weakens bondholder protections (March 24, p. 62).
Such corporate restructurings are "the only juice you're seeing," says Dave Johnson, a managing director with Merrill Lynch's Chicago office.
And if Alan Greenspan's latest action is any indicator, healthcare issuers shouldn't count on falling interest rates to ignite the market. The Federal Reserve chairman's decision last month to boost the federal funds rate by 0.25% pushed the benchmark 30-year Treasury Bond to 7.08%, its highest level in six months. The 30-year rate paid by A-rated tax-exempt healthcare issuers rose to about 6.3%.
For the first quarter, Smith Barney wears the crown for underwriting nine bond issues worth nearly $1.3 billion, more than one-third of all the new tax-exempt healthcare debt issued during the period. Bond counsel Hawkins, Delafield & Wood was the top adviser, with two deals totaling $509.1 million.