A Federal Reserve interest rate hike could come as soon as the panel's next meeting this month, but the move isn't likely to deter healthcare borrowing. It may even encourage providers to accelerate spending plans to stay ahead of rising rates.
Not-for-profit healthcare organizations have returned to the bond market this year to fund new projects and refinance older debt after a significant pullback in 2014. An improving economy, higher patient volume and benefits from the Affordable Care Act are boosting optimism across the sector.
In the first six months of the year, healthcare bond issuances totaled $18.9 billion, a 76% increase over the prior-year period's $10.8 billion, a Thomson Reuters analysis found.
Of that amount, $12.6 billion came from hospitals—a 215% jump over last year's $4 billion, according to data from advisory firm HFA Partners.
In the current low interest rate environment, even a 1% or 2% increase would probably have minimal impact, said Pierre Bogacz, managing director at HFA.
“The rate hike isn't going to have a huge impact because there's still a lot of cushion,” he said. “We're certainly not hearing that clients are concerned. But just like anything, they're watching it pretty closely.”
At a June press conference, Federal Reserve Board Chair Janet Yellen signaled that U.S. economic indicators, such as labor market data and price inflation, suggest it's time for a gradual interest rate increase by the end of the year.
With a policy meeting looming Sept. 16-17, some expect the Fed to follow through on that course of action, despite recent swings in the global stock markets owing to concern over China's economy.
The initial uptick is likely to be small, a quarter of a percentage point, for short-term rates. But it would gradually increase to 2.75% by late 2017.
“What would cause concern is a major uptick in rates quickly,” said Steven Kennedy, senior managing director at financial services Lancaster Pollard. But that isn't expected to happen.
Where health systems may feel the sting is in their investment portfolios, which are already lagging year over year, according to numerous earnings reports. Many health systems have changed their asset allocation to invest more money in bonds rather than stocks, which have been more volatile over the past decade. But as interest rates rise, bond prices fall, which could further hurt investment returns, Bogacz said.
Still, if anything, healthcare borrowers might move up capital spending plans to get ahead of the potential rate increase. “I think they're going to continue to put these projects on the front burner,” Bogacz said.
Not-for-profit hospitals also received a vote of confidence last month from Moody's Investors Service, which raised the outlook on the industry to stable from negative for the first time since 2008. The move could increase the appetite for healthcare bonds from municipal bond investors.
“Now you have a ratings agency communicating to an institutional investor base that, hey, things are not so bad,” Kennedy said. “I think it motivates health systems.… Now seems to be as good a time as ever to take action.”