Sparked by continued consolidation and low interest rates, healthcare providers stockpiled cheap debt last year.
And their exuberance isn't diminishing. With tax-exempt interest rates dipping to 30-year lows this month, many providers are expected to refinance outstanding debt in the coming months.
For the first time since the early 1990s, sales of new hospital and health system bonds last year surpassed the $20 billion mark. Securities Data Co., a Newark, N.J.-based financial information firm that tracks bond issues, says 514 new tax-exempt healthcare issues worth $21.5 billion went to market in 1997. While that wasn't a record total, volume is up 33% from 1996, when providers sold 434 issues totaling $16.1 billion. The record for the decade was set in 1993, with 782 issues worth $29 billion.
In the fourth quarter, bond buyers picked among 198 new tax-exempt healthcare issues worth $7.3 billion. That's an increase of nearly 47% from the year-ago quarter, when 148 issues worth $5 billion were offered.
Investment bankers chalk up the level of debt issuance to the continued formation of integrated delivery systems.
"I guess the most notable things were continued consolidation and the resulting restructuring and recapitalization of merged entities," says Edward Malmstrom, a managing director and manager of Merrill Lynch's healthcare and education group.
The year yielded a number of "landmark" deals in terms of dollar volume and system stature, Malmstrom says. It also featured a number of debt restructurings in which systems replaced existing bond covenants with arrangements with more flexible language allowing corporate parents to easily add or remove system members.
1998 looks to be just as robust.
"The market right now is as hot as a pistol," says David Cyganowski, managing director and co-head of Salomon Smith Barney's healthcare group.
Last week interest rates on 30-year insured debt flirted with 5%. A year ago, those same rates fluctuated near 6%.
"They're the lowest rates we've had in 30 years, so people are refinancing as well as doing new-money projects," Cyganowski says.
Adds Rae Boylan, a managing director in the healthcare group at Bear, Stearns & Co.: "You're getting close to seeing some transactions that have never been refundable start to look interesting." Rates have come down far enough to make it worthwhile to refund old debt issued when rates were in the 7% range.
And while rates are low, providers also are expected to combine refundings with "new money" issues for projects that might have been financed through cash or leases, says Jim Cain, a cofounder and principal with Cain Brothers, New York.