Feeding their demand for capital, hospitals continued to pile on tax-exempt debt at a strong clip in the third quarter, despite disruptions in the financial markets that delayed several deals in the final three weeks of the period.
Just less than $5.2 billion in tax-exempt healthcare bonds was issued in the quarter ended Sept. 30, up 46% from $3.55 billion in the third quarter of 2000, according to Newark, N.J.-based Thomson Financial Securities Data. Some 76 issues were sold, vs. 66 in the year-ago period. But the third-quarter figure was a bit less than the $5.23 million of debt issued in this year's second quarter, when healthcare debt issuance made something of a comeback, hitting its highest volume since the end of 1999.
Most big deals in the third quarter funded new capital projects, such as expansions and renovations. Healthcare issuers have increased their issuance of debt this year to meet pent-up demand, despite a chilly reception from investors that has led to more restrictive covenants to ensure debt payment.
The Sept. 11 terrorist attacks added to the uncertainty of how individual deals would be received. Several tax-exempt healthcare bond issues were delayed for nine days or more after the attacks as issuers waited for investors to return to the market. Despite the uncertainty, some hospitals were determined to press ahead and wasted little time jumping into the market.
One such deal was $145 million in financing for Community Foundation of Northwest Indiana, parent of 292-bed Community Hospital in Munster, Ind. Although Community has a relatively low credit rating, it needed the debt to complete a long-awaited acquisition of two hospitals from Hobart, Ind.-based Ancilla Systems. The purchase of Ancilla's 188-bed St. Catherine Hospital in East Chicago, Ind., and 176-bed St. Mary Medical Center in Hobart was announced in November 2000, and a purchase agreement was signed in May.
As a result of the attacks, pricing of the bonds was delayed two weeks, until Sept. 26. That pushed the closing deadline for the sales to Oct. 17 from Sept. 30. Ed Merrigan, a senior vice president at Ziegler Capital Markets Group, the deal's lead underwriter, says further delays might have led the parties to reopen negotiations, which nobody wanted.
The deal faces several challenges. The bonds were rated BBB- by Standard & Poor's, at the bottom of the investment-grade scale, which meant that it represented substantial risk for investors already wary of healthcare credits. In addition, the acquisition had an unusual structure that required a special effort to educate potential investors, Merrigan says. It was structured as an acquisition rather than a merger and did not employ a controversial bond structure called acquisition financing, which is under review by the Internal Revenue Service.
"We honestly didn't know the reception we were going to get," Merrigan says. He says the bonds were the first round of comparably risky healthcare debt issued since the attacks.
After talking to investors, bankers priced the debt "where we thought it should be" rather than cheapening the bonds in case the market was soft, Merrigan says. Slowly but surely, he says, they found buyers.