More than Warren Buffett's net worth.
That's how much new debt hospitals and health systems piled up in 1998.
Taking advantage of historically low interest rates, providers sold a record $32.6 billion in tax-exempt bonds last year, according to Securities Data Co., Newark, N.J. The year's total, reflecting 665 healthcare bond issues, exceeded financial titan Buffett's $31 billion empire.
" '98 topped them all," says Joseph Marion, a managing director in Merrill Lynch's healthcare finance department. The firm booked $4.7 billion of business as lead manager in 1998, trailing Salomon Smith Barney, the year's top underwriter, with $5.5 billion of healthcare debt under its belt. Marion predicts more hospital and system mergers in 1999 but doesn't expect bond volume to top last year's level, because he expects fewer refundings this year.
The amount of debt that providers assumed last year easily eclipsed the previous record, set in 1985, the year preceding the enactment of federal tax-reform legislation. New healthcare bond volume totaled $29.6 billion in 1985. Volume surged again in 1993, topping $28.6 billion-because of a flood of refundings. Last year, providers sold 514 issues worth $21.4 billion.
The market for healthcare deals sizzled through the fourth quarter. Securities Data says 157 bond issues worth $7.5 billion were offered in the October-to-December period. Those are fewer deals than the 197 in the year-ago quarter but slightly more than the amount of debt, $7.4 billion.
Last year's sub-6% interest rates lured many providers back to the bond market to refund old debt. Refundings accounted for $7.9 billion of the total, or about one of every four dollars of debt issued last year. In addition, many providers went to the market to lock in "new money" at low rates. Those deals totaled $15.7 billion, about one of every two dollars of debt issued last year. Another $8.9 billion of bonds was issued for dual purposes: to repay old debt and to fund new projects.
Although variable-rate debt can be cheaper, most borrowers opted for predictability in 1998. Of the $32.6 billion of debt sold last year, 86% carried fixed rates, according to Securities Data. In 1997, fixed-rate debt accounted for just under 70% of total bond volume.
As a hedge against future volatility, providers increasingly are taking advantage of financing structures that allow them to hedge variable-rate exposure through interest-rate swap programs.
Top healthcare borrowers for the year included Kaiser Permanente, an Oakland, Calif.-based healthcare system. In the third quarter of 1998, Kaiser took on $400 million of tax-exempt debt to fund various hospital and medical office projects. In December, it sold bonds worth another $301 million to refund debt for its operations in California, Hawaii, Maryland and Oregon. Kaiser's refunding generated net-present-value savings-savings over the life of the bonds in today's dollars minus the cost of the refunding-of more than $30 million, says John Landers, a managing director in the San Francisco office of Morgan Stanley Dean Witter & Co., managing underwriter of the deal.
"It was an incredible market this last year," says Landers, whose firm booked $1.3 billion of healthcare deals as managing underwriter last year. Remarkable, too, is the amount of debt that individual healthcare systems, such as Kaiser, issued in 1998. "The reality is in '85 we weren't doing deals this size," he says.
Deals are larger, bankers say, because healthcare systems are bigger. The year's top borrower, for example, was 18-hospital Catholic Health East, based in Radnor, Pa., which sold $1.1 billion of bonds in 1998.