Big systems helped hoist tax-exempt healthcare bond volume by a strong 10% in the first six months of 1997 and a rousing 25% in the second quarter ended June 30.
Total dollar volume in the three- and six-month periods rose even as the number of issues stayed steady or declined.
From April to June, 105 tax-exempt healthcare issues worth $5.1 billion were sold, compared with 103 deals worth $4.1 billion in the comparable quarter in 1996, according to Securities Data Co., a Newark, N.J.-based financial services firm. Securities Data recorded 172 tax-exempt issues worth $8.6 billion in the first half of 1997. That compares with 189 issues with principal amounts totaling $7.8 billion in the year-ago period.
It's not surprising, then, that some of the biggest backers of healthcare debt issues in the three- and six-month periods were Memorial Hospital System, Houston; Advocate Health Care, Oak Brook, Ill.; East Texas Medical Center Regional Healthcare System, Tyler; and New York City Health and Hospitals Corp.
"That's really consistent with the trend in the industry toward consolidation," says Neil Matthews, a managing director in public finance at Bear, Stearns & Co. It's the larger and regional systems that are doing the borrowing, he says.
For instance, Cincinnati-based Catholic Healthcare Partners' recent bond deal incorporates Humility of Mary Health Care Corp. as part of the system's corporate debt-issuing structure. Middleburg Heights, Ohio-based Humility of Mary merged with Mercy Health System earlier this year.
Systems are taking more of a "corporate approach" to borrowing, which is reflected in the types of deals completed, Matthews says. Partners HealthCare System in Boston, for example, issued $150 million in variable-rate debt to fund a pool the system can tap as it sees fit (June 30, p. 148).
"You're not looking necessarily at project finance but managing the balance sheet in total," Matthews explains.
Variable-rate debt is one balance-sheet management tool systems are applying liberally. From January to June, nearly $3.5 billion, or 40.3% of total bond volume, represented variable-rate debt, Securities Data reports. In the year-ago period, $811.1 million, or 10.3% of total tax-exempt healthcare volume, represented variable-rate debt.
The trend was even more prominent in this year's second quarter, when hospitals and healthcare systems sold nearly $2.5 billion of variable-rate issues, representing 48.4% of total tax-exempt healthcare debt. In the year-ago quarter, merely $770.8 million of variable-rate deals were completed, or 18.7% of total debt issuance.
As of June 23, interest rates on variable-rate bonds were running nearly 1.6 percentage points below A-rated fixed-rate, according to Cain Brothers. A year ago, the spread was even wider-some 2.6 percentage points.
Sources cited several reasons for the increased popularity of variable-rate bonds. In the case of Cox Health Systems, the move to variable-rate debt "was a strategy to save interest expense," says Larry Pennel, its senior vice president and chief financial officer. The Springfield, Mo.-based system is paying off a 1987 bond issue that carried a 6.9% interest rate and replacing those bonds with a new $46.6 million floating-rate debt issue. "We're betting that the average variable rate will be lower," he says.
The industry's increased focus on correlating assets and liabilities on the balance sheet also may be contributing to the increased use of variable-rate debt, sources note (Jan 20, p. 35). Another factor is the incremental use of swaps and other derivative financing structures, which make use of variable-rate debt, says Dave Johnson, a managing director in Merrill Lynch's Chicago office.
Finally, Johnson adds, as more fiscally strong healthcare systems adopt corporate-style indentures and restructure their old debt, new debt issues are incorporating variable-rate debt. Such AA credits have tended to have more floating-rate debt exposure than the average healthcare credit, he says.