The easy money of the last seven years is over. Healthcare borrowers face new calculations for when—and how much—to borrow.
The Federal Reserve raised the short-term interest rate last week for the first time in nearly a decade, and by doing so, set off some skittishness about how swiftly borrowing costs may rise. That could push some hospitals into the market to get ahead of future rate increases. But it could also mean tighter credit for heavily indebted hospital operators if anxious investors pull back from buying junk bonds.
Short-term interest rates, which the Federal Reserve held near zero for seven years to stimulate the economy, increased by 0.25 percentage points. The cost of borrowing remains low, but it is finally rising.
As she announced the rate hike, Federal Reserve Chairwoman Janet Yellen said future increases would follow in “a prudent and, as we have emphasized, gradual manner.” She also stressed that the initial boost to borrowing costs was minor and would be closely monitored. “I think it's important not to overblow the significance of this first move,” she said.
But for not-for-profit hospital borrowers that have delayed capital projects, the widespread expectation that rates will rise further could compel borrowers to come to market now to get ahead of the Fed's next action.
“We've all talked about it, and now it's going to happen,” said Steve Kennedy, a senior managing director at investment bank Lancaster Pollard, who works with not-for-profit healthcare organizations and senior-living borrowers.
However, hospitals hoping to avoid higher borrowing costs could end up pushing interest rates higher as they enter the market. That's because investors can demand higher interest rates when more borrowers compete for their cash.
“That really drives what the average hospital is going to pay, way more so than whether the Fed is going to raise interest rates,” said Pierre Bogacz, a managing director at HFA Partners, Tampa, Fla.
Not much will change immediately for investor-owned healthcare companies, which have already capitalized on the extended period of cheap borrowing to refinance debt and borrow for mergers and acquisitions, said Megan Neuburger, a managing director for Fitch Ratings. It's “probably business as usual tomorrow,” she said as the Fed announced the rate hike.
But there may be turmoil ahead for publicly traded healthcare companies, which generally have credit ratings that investors consider “speculative” or “junk.” That includes Community Health Systems, HCA, LifePoint and Tenet Healthcare Corp.