Supply & Demand 101: Hospitals borrow less, so funding costs are dropping

Hospitals with lower credit ratings are finding they can borrow at rates once reserved only for higher rated hospitals thanks to a confluence of factors in the municipal bond market. A shortage of new hospital bond supply is combining with continued strong investor demand and the overall low-interest-rate environment to drive down borrowing costs, experts said.

“It's the same phenomenon that's driving interest rates in general,” said Pierre Bogacz, a managing director at HFA Partners. “Lower credits have benefitted disproportionately.”

Eager healthcare investors, such as mutual fund managers that have cash they must invest in the municipal bond market, are finding a lower supply of new issuances, said Bruce Deskin, also a managing director at HFA. “The investors are reaching for yield,” he said.

Instead of funding large-scale building projects, hospitals recently have been funding smaller information technology purchases, and often they are going to commercial banks rather than the bond market, limiting supply, he said.

Healthcare borrowing last year reached its lowest level in more than a decade.

One measure of the cost of borrowing money—the spread between the interest rates that hospitals are paying and the municipal market data index—has continued to fall steadily since 2010, according to an analysis from HFA Partners, an advisory firm.

In 2014, for instance, hospitals with a BBB+ credit rating were borrowing with a spread as low as 1.36%—the same rate that hospitals rated higher at A+ could expect to borrow in 2010. For hospital rated A+ in 2014, the spread had fallen to 1.06%.

And for systems with a lower BBB- rating, spreads tightened last year to 1.9% above the municipal market data index from MMD plus 2.87% in 2010—nearly a full percentage point.

Most of the bond issuances in early 2015 have been for refunding purposes, according to a Modern Healthcare analysis of offering statements.

Yet some systems are still raising funds for major capital projects. Trinity Health, for instance, said in a financial filing that it is planning to issue $1 billion (PDF) in tax-exempt debt next month.

The proceeds will be used to buy, build and renovate certain unnamed facilities as well as for refinancing purposes. In addition, the Livonia, Mich.-based system next month plans to issue taxable bonds for similar purposes, and has so far filed an offering memorandum to raise $350 million.

Memorial Sloan-Kettering Cancer Center in New York City also plans to raise $550 million through taxable bonds to fund the construction of new ambulatory-care sites and support its expansion into the city's suburbs.

But other systems don't appear to be following suit, especially those that have weaker credit ratings. Even the threat of rising interest rates late this year hasn't incited a rush to borrow, Bogacz said.

“The larger systems are in the market; they're going to market,” he said. “It's the low-investment grade, maybe the weaker As, that haven't been as aggressive as they used to be.”

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