HFA Partners commented for Debtwire on how hospital new money issuance plunged in 2015 even as refinancings spiked, as hospitals continued to eschew capital project financings.
New money hospital bond issuance fell 32% in 2015 from a year prior to USD 4.7bn, its lowest level since at least 2004, according to a Debtwire Municipals analysis of Thomson Reuters/SDC Platinum data. The decline came even as overall bond issuances – which include refinancings – grew 39% to USD 22.5bn, the highest level since 2012.
Refinancings were higher because of low interest rates, and mirror the overall market increase, said four analysts. Municipal bond refundings increased 48.2% in 2015 to USD 247.4bn from the year prior, the highest level since record keeping began in 1996, according to data from the Securities Industry and Financial Markets Association.
"The increase had little to do with hospitals and more to do with interest rates," said Alan Schankel, managing director of municipal bond strategy and research at Janney Capital Markets.
Interest rates are so low that there are a lot of advanced refundings – some for bonds that aren't callable until 2019, said Pierre Bogacz, managing director at HFA partners, a municipal advisor for healthcare providers.
"Even with the cost of the dead money [which is held in escrow until the call date] it still works," said Bogacz.
From hospital to clinic
While rates have spurred refinancings, caution among hospitals over the changing healthcare environment has pressured new investment on capital projects, said Bogacz, with Wells Fargo analyst George Huang, and Evercore analyst Howard Cure agreeing.
"Really the nature of healthcare is changing, so the capital needs are evolving with that," Huang said.
The type of capital projects is also changing. Prior to healthcare reform and the recession, projects often consisted of new wings in hospitals, whereas now they're more likely to involve less expensive outpatient services, or information technology upgrades, Huang said. That's because there's been a greater focus in reducing unnecessary volumes and treating patients on an outpatient basis, which has left some areas with too many hospital beds.
"The larger driver of the change in nature of the capital has been related to reform," Huang said.
Likewise, because of the new projects, hospitals are carefully weighing any type of new capital project.
"A lot of hospitals are concerned about reimbursement rates and maintaining their finances, [and not taking out] new debt at this time for new capital projects," Cure said.
Another factor is hospitals' use of bank loans or direct placements, which would not show up in the data, said Huang, Bogacz and Schankel.
"Bank loans have taken a toll for sure," Schankel said. Bank loans may have the advantage of being less expensive, and also don't have the same type of public continuing disclosure requirements that traditional municipal bonds do, said Schankel.
Standard & Poor's estimated in February 2014 that as much as 20% of new municipal debt may be taken on through direct loans.New money hospital bond issuance feel 32% in 2015 from a year prior to $4.7 billion, it lowest level since at least 2004, according to a Debtwire Municipals analysis. The decline came even as overall bond issuance -which includes refinancings- grew 39%, the highest level since 2012.
(c) 2016 Debtwire.