Not-for-profit hospitals are borrowing at near-record numbers before the end of the year ahead of a sweeping tax overhaul that threatens to end or curtail their ability to issue tax-exempt bonds.
"There's an unbelievable flood," said Martin Arrick, a managing director in S&P Global Ratings' not-for-profit healthcare group. "This December is likely to the be the second busiest month ever. I mean like ever, ever, ever." The first busiest was back in December 1985, he said, when another tax overhauls was in the works.
The municipal bond market overall is shaping up to see roughly $20 billion in bonds issued in each of the first two weeks of December, compared with roughly $7 billion in a typical week, said Tom Kozlik, managing director and municipal strategist in PNC's Capital Markets Group. Interest rates have been fairly steady, meaning demand for the bonds is healthy.
The legislative provisions to eliminate the ability of not-for-profits to issue tax-exempt bonds could take effect Jan. 1, 2018. A reconciliation package taking shape in Congress could also prohibit advance refunding on previously issued bonds. The former provision is in the House version of the bill, while the latter is in both the House and Senate versions.
Hospitals are vocally opposing the changes. The California Hospital Association estimates the inability to issue tax-exempt bonds would increase the cost of borrowing for hospitals in the state by as much as $120 million annually. That group's counterpart in Wisconsin said hospitals there would pay about $79 million annually more.
Michael Peregrine, a partner with the law firm McDermott Will and Emery, said it's even prompting some hospital boards to consider converting to for-profit status, or diversifying their assets into for-profit subsidiaries. "Should we continue to stockpile our assets on the tax-exemption side if now or in the future those are subject to onerous regulation?" he said. "Or should we transfer existing assets to for-profit subsidiary for the appropriate valuation, and perhaps pursue additional transactions through joint ventures?"
Memorial Hospital, a 25-bed critical-access hospital in Abilene, Kan., just hurried through a bond refinancing that will save it $1.3 million over the next 18 years. The original $17 million bond issue allowed the hospital, which had revenue of $31.6 million in 2016, to build a new inpatient wing and emergency room. "Things were not in great shape, so we absolutely needed that to happen," CEO Harold Courtois said.
Losing the ability to refinance bonds is a possibility that's keeping Courtois up at night. "What that does to small hospitals like ours is if we need to save that kind of money, we can't look to those bonds anymore to refinance," he said.
The taxable market has generally been restricted to organizations with high credit ratings that can issue $250 million or more, according to S&P.
Courtois fears the worst: If hospitals can't issue tax-free bonds, they could be stuck with aging facilities that eventually won't be able to deliver modern care. "For some of those hospitals that have a really bad facility, it could cause them to close," he said.
It's a big concern in California, where state law mandates hospitals meet stringent earthquake safety requirements, and many are making those improvements using tax-exempt financing.
Among them is the Children's Hospital Los Angeles, which issued $170 million in tax-exempt bonds in 2007 to finance construction of an inpatient tower. The hospital has also saved about $30 million from refinancing bonds issued in 2012 and 2017. "That is a very clear and direct ability for us to save on financing costs," said Lara Khouri, the hospital's senior vice president and chief strategy officer. Trinity Health, Livonia, Mich., is among the systems rushing to get bonds issued this month. Dina Richard, the system's chief investment officer and senior vice president of treasury, wrote in a statement that it is coming to market a few weeks ahead of schedule because of the potential tax changes. "We view this as a risk mitigation strategy," she said.
—Alex Kacik contributed reporting to this article.
An edited version of this story can also be found in Modern Healthcare's Dec. 11 print edition.