A few healthcare bond issuers that had deals delayed by investor panic have returned to the market to find willing buyers and affordable interest rates.
Last week, two solidly rated not-for-profit health systems crept back into the market for short-term tax-exempt debt, which seized after a string of financial crises in September sent interest rates soaring as investors fled. On Oct. 16, CoxHealth, a two-hospital system in Springfield, Mo., issued $105 million in bonds and Bon Secours Health System, which is based in Mariottsville, Md., and operates 13 hospitals, successfully borrowed $293 million.
And the pairs triumph follows the Oct. 8 bond issue by the Sisters of St. Francis Health Services, an eight-hospital system based in Mishawaka, Ind. Investors snapped up roughly $280 million in short-term debt and at rates below what officials expected. We were delighted, absolutely delighted, said Jennifer Marion, the Sisters of St. Francis senior vice president of finance and chief financial officer.
Signs of life in the paralyzed market may signal an awaited ease in credit access for tax-exempt hospitals and health systems, which rely heavily on borrowing to finance construction and the industrys costly investments in technology and devices. The upheaval since September is one of the latest headaches for tax-exempt healthcare to stem from a worsening economy and a faltering global financial system.
The three recent deals, for variable-rate demand bonds, arent the only indication that healthcare borrowers may find takers for short-term debt.
One closely watched measure of interest rates for short-term tax-exempt bonds, published weekly, has ebbed to 4.82% as of Oct. 8 after spiking to 7.96% on Sept. 24 from 1.79% two weeks earlier.
Meanwhile, investors have gradually returned to money market fundssignificant buyers of healthcares tax-exempt short-term debtafter an exodus triggered by the Sept. 16 news that the Reserve Primary Funds exposure to a failed Wall Street investment bank sharply reduced its assets to below $1 per share. Money market funds lost a record $89.4 billion for the seven days that ended Sept. 16 and $120.5 billion the following week, according to iMoneyNets Money Fund Report newsletter. Federal officials moved quickly to guarantee losses below $1 per share and total assets rebounded to $3.45 trillion last week, from $3.33 trillion three weeks prior.
The Sisters of St. Francis Health Services plan to issue debt on Sept. 29 was cut short by Septembers financial chaos. Sisters of St. Francis officials, bankers and financial consultants spoke once or twice a day to monitor market conditions, Marion said. Finally, the system opted to test the markets on Oct. 8. Somebodys got to be first, she said.
The strategy proved more successful than expected, she said. Officials at the Aa3-rated system anticipated interest rates of 4% to 4.75% on bonds worth $280 million. Demand pushed the rates to 3.5% to 4.5%, which Marion attributed to the lack of similar investment opportunities. There wasnt anything else to choose from, she said, though a trickle of investors have tendered their bonds for payment since.
Bon Secours bonds, to refinance existing debt, priced on Oct. 16, said spokeswoman Peggy Moseley in an e-mail. We were pleased that demand for the bonds was excellent, resulting in competitive rates for the health system.
A continued thaw will likely release pent-up demand for variable-rate demand bonds, said Jeff Schaub, Fitch Ratings senior director in public finance. Variable-rate demand bonds typically change hands once a day or week, and interest rates vary with each deal. The variable-rate bonds also come with a pledge that investors may sell or put bonds back to the borrower if no one else emerges as a buyer. As markets froze in late September, investors exercised that right. Under those conditions, banks that backed the debt may be required to hold on to bonds, and eventually borrowers may face higher interest rates or be forced to pay back the debt quicklyin some cases in a matter of years, instead of decades.
Moodys Investors Service warned of the risks of such a scenario in a special comment last week. If the crunch significantly alters borrowers ability to make payments or undermines its credit strength relative to similar borrowers, credit ratings could be affected.
At least one hospital, 261-bed Cabell Huntington (W.Va.) Hospital, has seen ratings analysts react to the risk of issuing variable-rate demand bonds. Moodys analysts said the hospitals outlook was negative thanks to Cabells already thin cash cushion and the risk that it may be forced to rapidly pay back $97 million in variable-rate demand bonds. Moodys rated the bonds Bbb1 and downgraded its existing debt to the same rating from A3.