Low interest rates continued to buoy tax-exempt bond volume in the second quarter, although debt issuance lagged behind the year-ago period.
Healthcare debt totaled almost $4.4 billion, down from nearly $5 billion in the second quarter of 2001, according to Thomson Financial Securities Data, Newark, N.J. In the second quarter of 2000, issues totaled $4.17 billion.
Of the quarter's 102 deals, 74.6% of debt issued was new financing, 13.4% refunded existing debt, and 12% was a combination. Some $1.2 billion was insured, while $562 million was backed by a bank letter of credit.
For the first six months of 2002, bond issuance totaled $8.9 billion, compared with $7.3 billion in the first half of last year.
"It's fairly robust, having to do with low interest rates," said David Ertel, an executive director at Morgan Stanley. He said he expected volume to stay steady through year-end. Morgan Stanley was the lead underwriter in the quarter, with six issues totaling $901 million.
It remains to be seen what effect the Internal Revenue Service's long-awaited guidance on acquisition financing, issued in April, will have on bond volume (April 15, p. 6). Acquisition financing drove much of the record debt issuance of the middle to late 1990s.
Although some experts have predicted a surge in merger-related financing now that providers have clear ground rules, Ertel is skeptical that there will be a major increase given the more "conservative" nature of the proposed regulations. Comments on the regulations are due this week, and a hearing is expected in August.
Taking advantage of the low interest rates was Kaiser Permanente, the quarter's largest issuer, with a $500 million deal. The money will be used primarily to build a replacement for its Santa Clara (Calif.) Medical Center, as well as for construction and renovation of outpatient clinics and inpatient facilities throughout California.
Like many providers marketing their bonds, Kaiser benefited from improved operating results. The integrated system had net income of $680 million in 2001, on revenue of $19.7 billion. Bill Hansen, director of investments and financings at Kaiser, said the system tapped the bond market, even though it had a healthy stash of cash-some $3 billion. Kaiser will pay a modest 5.5% interest rate on its uninsured 30-year fixed-rate debt, he said.
In a sign that volume is not slowing, Kaiser's deal will be topped this month by a planned $600 million financing by the New York City Health and Hospitals Corp.
Two of the quarter's five largest issuers are in California (See chart), but many providers in that state are holding off until they know whether the state will offer financial or regulatory relief from seismic retrofitting requirements set to take effect in 2008, said Andrew Pines, director of western region healthcare finance at Salomon Smith Barney.
Nevertheless, Pines said with variable-rate interest running well under 2%, he's urging clients to act now. "We encourage folks to take more of what we call a corporate-finance mentality, which says when rates are low, borrow-regardless of where you stand with your capital projects," Pines said.