Weak investor demand for tax-exempt bonds has made it more costly for hospitals to finance construction or health information technology. But one California health system successfully entered the market in recent weeks to refinance $78 million and emerged with more time to pay off the debt as well as interest-rate savings.
Finding a silver lining
Officials with Sharp HealthCare, San Diego, monitored the tax-exempt market—where investors have sharply pulled back and yields have climbed—and were prepared to delay the system's refinancing, if necessary, says Alison Fleury, Sharp's senior vice president of business development.
Preparations for the refinancing began late last summer as Sharp closed out its fiscal year on Sept. 30, then approached credit-rating agencies with plans to enter the market this month. But by November, favorable interest rates that had lured hospitals into the tax-exempt market had disappeared. “When rates hit an all time low, you know it's not going to stay,” Fleury says.
Borrowing costs climbed in the final weeks of the year. Anxious investors began to drain billions of dollars from funds that buy tax-exempt bonds—a flight that has continued into the New Year. Borrowers rushed to issue bonds ahead of Dec. 31 on fears (which proved accurate) that Congress would not extend credit support for tax-exempt borrowers set to expire at year end.
Higher yields and volatility prompted some healthcare borrowers to delay or scale back refinancing. Sharp did not after officials put together bonds that took advantage of lower interest rates for shorter-term debt and went to investors with credit upgrades, Fleury says.
No adequate savings resulted by refinancing with bonds that must be paid back over 30 years, she says. But at 20 years, Sharp could lower its interest costs by 3% while giving the system more time to pay off debt first borrowed in 1998 and 2001. That extra time is expected to boost Sharp's cash flow by $41 million, which was critical to the deal. Sharp has depleted its cash by financing some capital projects with cash rather than debt, she says. The deal is expected to close in February.
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