Something borrowed

Not-for-profit hospitals and health systems have closed or unveiled deals recently that suggest improvement in shaky credit markets for healthcare borrowers.

Two notable deals last week underscore what appears to be some relief—at least for higher-rated hospitals and health systems—from the high cost and limited capacity in municipal markets since last fall’s credit crisis, said healthcare analysts and finance experts.

Geisinger Health System, which holds an Aa2 rating from Moody’s Investors Service and AA from Standard & Poor’s, found willing investors last week for $115 million on 30-year bonds at an enviable interest rate of 5.3% and $27 million on 25-year bonds with an interest rate of 5.17%. “The market did move in our favor,” said Kevin Brennan, executive vice president of finance and chief financial officer of Danville, Pa.-based Geisinger, which owns three hospitals. And Kaiser Permanente went to municipal markets last week for a whopping $950 million in municipal bonds with plans to issue another $900 million in coming weeks on a solid investment grade credit rating of A+ from Standard & Poor’s and Fitch Ratings.

Martin Arrick, a Standard & Poor’s managing director, said easing interest rates and larger deals “are signs the markets are opening.”

Municipal finance experts said that investors appear increasingly eager to lend to hospitals and health systems with strong or solid credit ratings as cash continues to pour into municipal markets and supply of high-quality bonds shrinks with federal aid to credit-squeezed states and cities.

Anxious investors who yanked more than $14 billion out of municipal funds in the final months of 2008 have poured roughly $20 billion back into the market since January, according to data and estimates from the Investment Company Institute.

And that surging demand has come up against a drain on supply that has pushed interest rates lower among the states and cities that issue municipal bonds. That has benefited tax-exempt healthcare borrowers by raising demand for their debt as investors search for higher yields, said Matt Fabian, managing director for Municipal Market Advisors.

Under the recently enacted American Recovery and Reinvestment Act of 2009, state and local governments can temporarily issue taxable debt with temporary federal subsidies—an option they have exercised that has shrunk the supply of municipal bonds. Fabian said governments have issued $10 billion of the so-called Build America Bonds.

“You’ve got more money chasing fewer bonds,” said David Cyganowski, a managing director and healthcare co-head for Citigroup. That appears to be lowering interest rates, he said. Cyganowski noted the 7.25% yield on OSF Healthcare System’s long-term bonds issued in March and the 6.15% yield on long-term bonds issued by the similarly rated Catholic Healthcare West in late April after Build America Bonds came to market.

OSF Healthcare, a six-hospital system based in Peoria, Ill., carries ratings of A2, A and A from Moody’s, Standard & Poor’s and Fitch, respectively. Catholic Healthcare West, a 38-hospital system based in San Francisco, holds A2, A and A+ ratings from the three agencies, respectively.

Jeff Schaub, an analyst with Fitch, said that borrowers returning to credit markets after delaying bond issues during last fall’s volatility are largely highly rated credits, with less activity among lower investment-grade borrowers.

Still, analysts and healthcare executives who attended last week’s 10th annual Non-Profit Health Care Investor Conference said hospitals and health systems with average or week finances face headaches, higher costs and limited or no access to credit.

The conference, which is sponsored by the American Hospital Association, Healthcare Financial Management Association and Citigroup and does not allow media to attend presentations, included 28 healthcare presenters, representing more than $33.8 billion in long-term debt.

Even though the official conference theme was on transparency, liquidity and borrowing obstacles for lower-rated healthcare issuers were perhaps the unofficial focus. Stephen Walter, senior vice president and CFO of Community Medical Centers, Fresno, Calif., said the three-hospital system’s plans to borrow $200 million for much-needed expansion of its 76-bed Clovis (Calif.) Community Medical Center have been on hold since last October. Moody’s rated Community Medical Centers Baa2. Standard & Poor’s and Fitch rated the system BBB-. Walter said that despite strong operations, the system’s $347 million outstanding debt and modest cash reserve leave the system with few options but to build its balance sheet and wait for credit markets to reopen. “It’s a flight to safety,” he said. “We’re triple B and that’s all.”

Borrowers able to enter the market said they must be more creative.

Tom Meier, Kaiser’s senior vice president and corporate treasurer, said that the system diversified its tax-exempt debt into multiple vehicles and targeted medium-term investors in a bid to curb its debt costs.

The Charleston (W.Va.) Area Medical Center, which holds a solid investment grade rating from Moody’s of A2, began searching in February for a bank to extend credit and liquidity backing to refinance $150 million from the auction market for municipal debt, which seized in February 2008 as the nation’s housing meltdown began to upend credit markets.

Larry Hudson, executive vice president and CFO for the CAMC Health System, which owns the 776-bed hospital, said the hospital approached 11 banks but none agreed to offer a letter of credit for the entire $150 million. Such bank backing has grown harder to secure and more expensive amid banking industry distress and consolidation.

That has forced CAMC to negotiate a more complicated deal to refinance $50 million with one bank and an equal amount backed by a consortium of banks. The remaining $50 million would be converted from auction debt to bonds sold to long-term investors at a fixed interest rate. Roughly one year ago, the hospital found a single bank to guarantee $127 million. “The rules have changed,” Hudson said.

What do you think?

Write us with your comments. Via e-mail, it’s [email protected]; by fax, 312-280-3183.