Not-for-profit healthcare providers are starting to return to the municipal bond market, but they were more likely to refinance older debt than borrow new money, according to an analysis of first-quarter bond offerings.
Healthcare issuers borrowed $8 billion in the first quarter of this year, compared with just $3.5 billion in the same period in 2014, the analysis from advisory firm HFA Partners found. Hospitals borrowed $5.8 billion of that total, up from $1.4 billion in the prior-year period.
Healthcare organizations increased their borrowing levels after a year when new issuances reached their lowest level in more than a decade.
But many healthcare providers are starting to see their operating margins improve as more patients gain insurance coverage and the overall economy picks up. Larger systems in particular are more willing to take on new debt to finally tackle capital projects that had been sitting on the back burner, said Pierre Bogacz, managing director at HFA.
“They're easing what was a very conservative stance in taking out new debt,” he said. “The more optimistic management is about the economy … the more they're going to start loosening the ties on these projects.”
The first quarter's healthcare borrowers included Trinity Health in Livonia, Mich., which is raising $1 billion in part to buy and renovate new facilities; Memorial Sloan Kettering Cancer Center in New York City, which is committing $550 million to build new ambulatory-care sites and fund its expansion into the suburbs; and the University of Kansas Hospital in Kansas City, Kans. which issued more than $250 million in bonds to help finance a new hospital campus.
Yet only 27% of the bonds issued in the first quarter, or about $1.5 billion, will go toward new debt while the remainder will be used for refinancing, the analysis found. In contrast, during the same period last year, 80% of bond issuances funded new projects.
Historically low interest rates are spurring the increase in refundings, Bogacz said. Moreover, because refinancing typically requires more money than new projects, the average bond issuance shot up to $130 million in the first quarter, compared with $66 million in the prior-year period. The analysis only tracked fixed-rate deals and excluded variable rate deals.
The second quarter of this year may prove to be even more active than the first, including new projects. Health systems that went to the bond market in the second quarter included Texas Health Resources in Arlington, with a $360 million bond offering; Baylor Scott & White Health in Dallas, which is spending about half of the proceeds of a $550 million issuance on constructing new facilities; and MultiCare Health System in Tacoma, Wash., which will use a portion of its $373 million bond issuance to fund an expansion project at two hospital sites.