Having loaded their plates with cheap debt in the previous 36 months, providers turned their noses up at the bond market last year as if it were a warmed-over buffet.
Increased financing costs because of higher interest rates and a scarcity of bond enhancement for healthcare providers also served to curtail new debt last year. Many hospitals stayed busy with operational improvements rather than capital-hogging new ventures.
The year saw 292 tax-exempt healthcare issues totaling $13.7 billion, according to Thomson Financial Securities Data, based in Newark, N.J. That's down 35% from $21 billion of debt and 431 issues in 1999. Most of the decline was attributed to a drop in new financing rather than refunding of existing debt.
In the fourth quarter of 2000, there were 92 issues totaling $3.4 billion, down from 95 issues worth $5.7 billion in the year-ago quarter.
Last year was the slowest for new tax-exempt healthcare debt since 1995, when there were 343 issues totaling $11.2 billion. In 1997, 1998 and 1999, healthcare issuance topped $20 billion annually, reaching a record $32.8 billion and 668 deals in 1998. That financing frenzy was driven mainly by merging hospital systems that refinanced existing bonds to create more efficient debt structures, helped along with favorable interest rates.
With their financial health at a low last year, many hospitals didn't have a good story to tell the market, and bond insurers tightened their rules for credit enhancement. That added to the cost of issuing debt. Some $5.3 billion of tax-exempt healthcare debt was insured in 2000, down 52% from $11.1 billion in 1999.
Richard Kolman, managing director for municipal finance at the New York office of Goldman, Sachs & Co., says last year's totals look especially paltry compared with the previous boom years'.
"Clearly, you had people being a little bit more cautious about new debt and looking at other ways to work on their balance sheets," he says.
Last year, U.S. long-term municipal bond volume dropped 11.5% to $194.2 billion, compared with $219.9 billion in the previous year. Higher interest rates were one of the key reasons cited.
Generally, market observers expect an increase in healthcare bond volume this year, thanks to pent-up demand for capital and a moderation in rates. Some hospitals and systems that issued new debt in early 2000 are expected to return to the market to refinance in the coming months to take advantage of better rates.
Last week, rates on 30-year insured debt were 6.13%, compared with 6.7% a year earlier, according to Cain Brothers, a New York-based investment banking firm.