Driven by the largest tax-exempt healthcare bond issue on record, bond sales rose to unprecedented levels during this year's first quarter.
The $1.1 billion in bonds issued by Catholic Health East in early January is just the latest example of healthcare providers continuing to issue debt at cheap interest rates and in voluminous amounts.
Interest rates on 30-year insured debt have been fluctuating around 5.25%. A year ago those same rates hovered near 6%.
Sales of new hospital and healthcare system revenue bonds in the first quarter totaled nearly $9 billion, a 150% increase from $3.6 billion in the first quarter of 1997, according to Securities Data Co., a Newark, N.J.-based financial information firm that tracks bond issues. The number of tax-exempt healthcare issues nearly doubled to 143 in the quarter ended March 31 from 75 in the year-ago period.
CHE, which comprises 30 hospitals, on Jan. 9 conducted six bond issues by three state and municipal authorities that totaled more than $1.1 billion, and on Feb. 13 another two issues in two states that totaled more than $120 million. Merrill Lynch & Co. was the managing underwriter for the CHE issues.
"It's by far the largest single issue," says Edward Malmstrom, managing director and manager of Merrill Lynch's healthcare and education group.
CHE was created last year through the merger of Allegany Health System, Tampa, Fla.; Eastern Mercy Health System, Radnor, Pa.; and Sisters of Providence Health System, Holyoke, Mass. (June 2, 1997, p. 8). The Radnor-based system operates facilities in 10 states and has annual revenues of $2.8 billion.
Other large Catholic healthcare systems have made large tax-exempt bond issues in the past year, but they didn't top the $1 billion mark. Denver-based Catholic Health Initiatives issued $834 million in bonds last year, and St. Louis-based Daughters of Charity National Health System sold 16 issues worth $560 million in the fourth quarter of 1997, according to Securities Data.
Analysts say it's likely that continuing consolidation in healthcare will keep fueling the tax-exempt bond market the rest of the year.
"Some economists are saying interest rates could fall more, and inflation continues to be low," Malmstrom says. "But I'm of the school to take the money now and run."
Others don't expect interest rates to drop, but they're confident the current market will keep not-for-profit hospitals coming back to refinance more expensive debt.
"As long as interest rates stay down in this area, we are going to continue seeing healthcare refinancing," says Ed Hoffman, an analyst at Cain Brothers in New York.
Even though Merrill Lynch was the underwriter for the biggest deal in this year's first quarter, Goldman, Sachs & Co. edged the firm out of the top spot on the ranking of managing underwriters. Goldman, Sachs was involved in 10 bond issues worth a total of $1.7 billion, while Merrill Lynch was managing underwriter on 20 issues worth a total of just over $1.6 billion.