Higher interest rates, credit deterioration and fewer mergers in 1999 curtailed a previous frenzy of bond activity by not-for-profit healthcare providers.
New issues totaled $21.4 billion, down from a record $32.8 billion in 1998. The number of new issues dropped to 430 from 668 the previous year.
The dip in bond volume was relative. Last year was the third most active year for total bond volume of the decade, with only 1998 and 1993 being higher.
In the fourth quarter of 1999, issues totaled just under $6 billion, down from $7.8 billion in the year-earlier period. The number of issues fell to 94 from 163.
Thomson Financial Securities Data, Newark, N.J., reported the figures.
In general, providers were not looking to finance fancy capital projects, with a few exceptions for information systems, outpatient facilities and hospital replacement projects, experts say. The biggest deals involved newly merged mega-systems looking to restructure existing debt.
Christus Health, a recently merged system based in Irving, Texas, was the second-largest issuer of bonds in 1999. The system took advantage of favorable market conditions to do some fine-tuning, says interim Chief Financial Officer Willy Kuehn. It captured lower interest rates with a shift to fixed long-term debt and insured more of its debt, he says.
Only $115 million of its $643.6 million in principal went to new projects-namely the purchase of two hospitals in the Shreveport, La., market.
Similarly, the year's biggest issuer was a credit group led by Ascension Health. St. Louis-based Ascension was created last fall through the merger of Daughters of Charity National Health System, St. Louis, and Sisters of St. Joseph Health System, Ann Arbor, Mich. The credit group used its $2.4 billion in proceeds to restructure existing debt.
Before merging to form Ascension, the Daughters belonged to a consortium called Charity Obligated Group, which issued $552.6 million in debt. Other consortium members were Baptist/St. Vincent's Health System, Jacksonville, Fla.; and West Maryland Health System, Cumberland.
Activity isn't likely to accelerate anytime soon. As of mid-January, interest rates had already climbed from their levels late last month, notes Edward Malmstrom, managing director and group manager of healthcare finance at Merrill Lynch & Co. He says that with interest rates at least one percentage point higher than they were a year ago, he expects lower or, at most, equal volume in 2000.
In addition, credit concerns about the industry have made it more difficult for providers to get insurance for their bonds. That has roughly tripled the gap in yields between insured and uninsured debt in recent months, Malmstrom says.
"In some respects the market has overreacted on the negative side, but it's understandable given the red ink that's been flowing," he says.
Kuehn says he's pleased with the results of debt restructuring. "Rates have gone up substantially. The cost of insurance has gone up. In very short hindsight, we look really smart," he says.