Maternity suites need spiffing up? Any outstanding debt to refund?
With interest rates dropping to their lowest levels in decades, hospitals are scraping together as many tax-exempt projects as possible and loading up on irresistibly cheap debt.
Interest rates on long-term A-rated healthcare bonds hovered below 5.5% during the three months ended Sept 30. As the quarter ended, the yield on the bellwether 30-year Treasury bond slid below 5% for the first time in 30 years.
While some providers are taking advantage of refunding opportunities, others are tapping low-cost capital for anticipated expenditures, says Steve Proeschel, a managing director and lead tax-exempt healthcare banker at Minneapolis-based Piper Jaffray. "Being able to lock in sub-5% debt is just extraordinary," he said.
That helps explain providers' continued ravenous consumption of debt.
During the third quarter, 159 healthcare new issues were sold with a total principal amount of more than $7.1 billion, according to Newark, N.J.-based Securities Data Co. That's a 44% increase in volume from the year-ago quarter.
New long-term debt issuances-some $24.6 billion from January through September-already exceed last year's 12-month total of $21.5 billion. 1998 is moving along at a record-breaking pace. With three months to go, healthcare bond volume is likely to break the $29 billion record set in 1993.
Among larger deals of the quarter, Manhasset, N.Y.-based North Shore Health System's $278.5 million issue is typical because it combines a refunding of outstanding bonds with several "new money" projects. New debt will fund everything from renovations to construction of an additional cardiac catheterization lab.
Roughly half of the quarter's volume-some 95 deals worth $3.6 billion-was for new money. The balance represented refundings or some combination of refundings and financings for new projects.
Bond volume got a boost from the not-for-profit consortium that agreed to buy 21 hospitals from Nashville-based Columbia/HCA Healthcare Corp. for $1.2 billion. Three of the top 10 tax-exempt issuers of the quarter-Durham, N.C.-based Duke University Health System, Johnson City (Tenn.) Medical Center and Pitt County Memorial Hospital, Greenville, N.C.-are consortium members.
The quarter's top underwriter, Salomon Smith Barney, helped consortium members structure the transaction and issue debt to fund the purchases.
The opportunity to make those deals means some providers are taking on more debt than ever.
Duke's $200 million deal for Raleigh (N.C.) Community Hospital and other planned acquisitions will boost its debt-to-capitalization to 49.5% in 2001 from 33.2% in 1997, according to Standard & Poor's. The New York-based credit-rating agency isn't bothered by the projected rise in leverage, saying bondholders ultimately will benefit from Duke's expansion. But increased leverage and integration pressures are a concern to Moody's Investors Service, another New York-based rating agency, which maintains a negative outlook on the credit.
For similar reasons, Moody's recently lowered the rating on the flagship of another consortium member, Montgomery, Ala.-based Baptist Medical Center. The downgrade to A1 from A2 reflects parent Baptist Health's acquisition of four Columbia hospitals.