Downgrades and dour industry forecasts haven't caused healthcare providers to slink away from the bond market. Big systems are simply taking their licks from the rating agencies and plowing ahead.
Granted, tax-exempt volume dropped 45%, to $5 billion, in the first quarter of 1999 from $9.1 billion in the year-ago period, according to Securities Data Co., a financial data company based in Newark, N.J. The number of issues slipped, too-to 108 in the quarter ended March 31 from 147 in the first quarter of 1998. But that's because 1998 was an extraordinary year, marked by historic levels of hospital bond sales.
Many providers took advantage of low-interest refunding opportunities in 1998, explains Janice Hayes-Cha, director of business development at the Massachusetts Health and Educational Facilities Authority, a Boston-based agency that issues hospital bonds. "We anticipate a slower year this year," she says.
"It's definitely a much more challenging environment for providers," concedes Edward Malmstrom, managing director and manager of the healthcare group at Merrill Lynch & Co., New York. "Issues like the (Balanced Budget Act of 1997) are having a negative impact, and that's beginning to be reflected in (providers') financial performance," he says.
Merrill served as lead underwriter on $1 billion in healthcare deals in the quarter ended March 31, including the largest deal of the quarter, a $306 million issue backed by Alexian Brothers Health System. Alexian's deal shows providers' willingness to assume more debt for strategic purposes.
The Elk Grove Village, Ill.-based healthcare system issued its bonds to purchase two Chicago-area hospitals from Columbia/HCA Healthcare Corp. The deal increased Alexian's leverage, triggering a downgrade to Baa1 from A2 by Moody's Investors Service.
"They felt that the acquisition was the right thing to do strategically to improve their market position in the northwestern suburbs of Chicago, but in order to do that they needed to incur significantly more debt, and thus the margin for error was reduced, and the debt burden caused the downgrade," Malmstrom says. As a result, Alexian opted to insure the bonds through Financial Security Assurance, the New York-based bond insurer.
Alexian saved 25 to 30 basis points by insuring the deal, says Raymond Kostelc, the system's vice president of finance. If the bonds went unenhanced on Alexian's own rating, the money would have cost 5.6% to 5.65%. With backing, the average coupon dropped to 5.04%. The total cost of the money, including the bond insurance premium, was just 5.37%.
Kostelc says he is confident Alexian can repay the debt.
Providers also continued their quests for opportunities to consolidate old debt and refinance it at current interest rates. In January, Boston-based Caritas Christi sold nearly $200 million worth of bonds-its first system-sponsored deal. Steven Fischer, the system's senior vice president and chief financial officer, says the refunding generated present-value savings of $11.7 million.