With six months to go, tax-exempt healthcare providers are well on their way to issuing a record-breaking heap of debt.
With the help of a number of big system-backed deals, total tax-exempt debt volume reached $17.5 billion in the first half of 1998, according to Newark, N.J.-based Securities Data Co. Among the 330 new tax-exempt healthcare issues sold during the January-to-June period were names like Radnor, Pa.-based Catholic Health East, St. Louis-based SSM Health Care System and Denver-based Catholic Health Initiatives.
Unless there is some unforeseen bust in the nation's economic boom, sales of healthcare bonds will bury last year's total, analysts say. In all of 1997, tax-exempt healthcare providers sold 514 new issues worth $21.5 billion, Securities Data says.
The record-$29 billion, set in 1993-could easily be shattered by year-end.
This year's volume is up a staggering 93% from the first half of 1997. Capital-hungry hospitals and health systems made 193 bond issues worth $9 billion in the first six months of 1997.
Low interest rates and the continued consolidation and repositioning of healthcare assets helped fuel bond market activity, says Darrel Flanel, a senior vice president with Lehman Brothers in New York. When there is a "wholesale shifting of assets," providers generally take stock of their systems' overall capital structure, he says. That results in some reconfiguration of providers' debt portfolios.
HMO consolidation also is prompting some of the activity, Flanel adds. The emergence of two to three powerful HMOs in a market forces healthcare providers to weed out excess capacity by realigning assets and adjusting their capital structures.
In this year's second quarter alone, providers went to the bond market with 177 issues worth $8.1 billion. Based on dollar volume, that's up 48% from the 118 issues worth $5.5 billion issued in the year-ago period.
While refundings continued, much of the debt issued in the first half of the year represents new financings of tax-exempt projects. Of the $17.5 billion, healthcare providers raised $8 billion in new money, refunded $4.8 billion of old debt and sold $4.7 billion of issues that combined refundings with new financings, according to Securities Data.
Long Island Jewish Medical Center's $169 million combination refunding/new financing was driven in part by the low interest rates. The medical center's long-term bonds, at 5.25%, will help finance the expansion of operating rooms and labor/delivery facilities, investments in a clinical information system, and replacement of two boilers and cooling towers, hospital officials say.
"I think we got an excellent rate," says Rick Annis, senior vice president and chief financial officer of the New Hyde Park, N.Y.-based hospital. "You know, timing is everything."
The favorable interest-rate environment has lasted for some time now. In January rates dipped to record lows and largely have remained below year-ago levels. As of July 6, the interest rate on a new 30-year, A-rated hospital bond was 5.45%, down from 5.9% a year ago, according to New York-based Cain Brothers.
The first half of the year was a grand time for underwriters, bond counsels, rating agencies, bond insurers and others who make their money helping providers sell bonds. At the half-year mark, Merrill Lynch & Co. edged out perennial competitor Salomon Smith Barney as top underwriter. But Salomon Smith Barney led in the second quarter, booking $1.2 billion of deals compared with Merrill Lynch's $910 million.