Tax-exempt healthcare bonds trickled to market in the first quarter, but bankers say they still expect a healthy stream of new issues later this year.
Bankers have been forecasting a surge driven by pent-up demand for capital and better financial performance by some hospitals and healthcare systems. Interest rates, at their lowest levels in two years, also should help the cause.
"These rates are too good to ignore for many borrowers," says Andrew Pines, a director in the Los Angeles office of Salomon Smith Barney.
For the quarter ended March 31, 51 deals were completed worth a total of $1.94 billion. That's down from 62 deals worth $2.68 billion in the first quarter of 2000, and less than half the volume of the first quarter of 1999.
Nearly all of the debt issued in the first quarter-97%-was "new money" rather than refundings or refinancing of existing debt, according to Thomson Financial Securities Data, Newark, N.J., which tallies the data. That's up from 72% in the first quarter of 2000, when 28% of the bonds was for refundings, often to seal mergers.
One damper on recent bond volume has been a slowdown in mergers. "If you're not acquiring, you're not financing," notes Edwin Hoffman, a principal at Cain Brothers in New York.
Others say it's taking a little longer to get deals assembled. Bond insurance is tougher to obtain than it was two years ago, and most debt involves new projects, which are being carefully reviewed by executives and trustees, observes Mark Melio, managing director and head of the not-for-profit healthcare group at J.P. Morgan in Chicago. Hospitals "are making sizable capital plans," Melio says. "They want to make sure they're comfortable."
Melio says his firm's pipeline has more than $1.5 billion in issues to be completed by year-end, driven partly by growing demand for healthcare services. Deals of more than $400 million each are planned by Children's Hospital of Philadelphia, Memorial Sloan-Kettering Cancer Center in New York, St. Luke's Episcopal Health System in Houston and Methodist Hospital in Houston, he says.
Overall, though, the industry continues to fight credit deterioration that began two years ago. Hospitals with low credit ratings continue to pay significantly higher rates for debt than those with better credit.
Edward Malmstrom, a managing director at Merrill Lynch & Co., says one of his firm's deals during the first quarter, a $210 million offering for the Health Alliance of Greater Cincinnati, was a private placement, which meant it wasn't included in the tallies for tax-exempt bond deals. Merrill Lynch bought the Health Alliance debt, Malmstrom says. "Where market access hasn't been good, we've extended our own position more frequently," he says.
To talk up the investment potential of their organizations, executives of at least 38 healthcare systems have agreed to speak to institutional bond purchasers at the second annual Non-Profit Healthcare Investor Conference set for May 17 and 18 in New York. The conference, sponsored by the American Hospital Association's Health Forum and the Healthcare Financial Management Association, is drawing more health system presenters than last year, says Jeannette Price, a vice president at Salomon Smith Barney, which is organizing the invitation-only event.
She says some providers wanted to see how the inaugural forum was received before deciding to participate. "Last year was a harder year for systems. This year, a lot of systems are in a better position and they want to get out and talk about it."