HCA Leads Credit Swap Jump as Hearings Cast Cloud on Health Law

The cost to protect against losses on the debt of U.S. health-care companies is rising as investors hedge against potential declines when the U.S. Supreme Court rules on President Barack Obama’s landmark health law.

Credit-default swaps linked to hospital operators HCA Holdings Inc., Tenet Healthcare Corp. and Community Health Systems Inc. are poised for the biggest monthly increase since September, climbing an average 88 basis points to 604 basis points, according to data provider CMA. Swaps on HCA, the biggest U.S. hospital chain, reached the highest relative to a benchmark in more than five months on March 26, the day before a new version of the index started trading.

Investors are buying protection against a decline in health-care company bonds as the nation’s highest court wraps up three days of hearings challenging the constitutionality of the health law, which expands insurance to cover about 32 million people who would otherwise lack it. Several justices expressed skepticism yesterday that the law is constitutional.

The swaps on hospital operators moved wider “in concert with the uncertainty,” Diya Sawhny, an analyst at New York-based CreditSights Inc. said in a telephone interview.

While speculative-grade health-care bonds have had the best start to a year since 2009, the jump in credit-default swaps on the securities signals growing concerns that the Supreme Court’s decision will damp future gains.

HCA Swaps

Bonds of health-care companies rated below investment grade gained 5.1 percent in the first two months of the year and have lost 0.3 percent this month, according to Bank of America Merrill Lynch index data.

Swaps on HCA, the biggest issuer in the index, have jumped 55 basis points this month to 511 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts climbed to within 30 basis points of the Markit CDX North America High Yield Index on March 26, the narrowest gap since Oct. 4. The company had $27.1 billion of long-term debt at the end of 2011, according to a regulatory filing.

Contracts tied to Tenet Healthcare, the third-largest U.S. hospital operator, have climbed 97 basis points in March to 637 basis points, CMA prices show. Swaps on Community Health, the second-largest, rose 112 to 664.

Credit swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Broad Market

A broader gauge of corporate credit risk rose today. The Markit CDX North America Investment Grade Index, a benchmark gauge of credit risk tied to 125 companies in the U.S. and Canada, climbed 1.4 basis points to a mid-price of 90.8 basis points at 5:12 p.m. in New York, according to Markit Group Ltd.

The individual mandate, the requirement that most Americans purchase insurance, is at the heart of the health-care law, which overhauls an industry that accounts for 18 percent of the U.S. economy.

“Just getting some clarity on some of these issues around the Affordable Care Act will improve investor sentiment around the space because it’s been hanging over the industry the past two years,” Megan Neuburger, an analyst at Fitch Ratings in New York, said in a telephone interview.

June Ruling

A full scale rejection of the individual mandate would result in a smaller insured population which would be generally worse for the health-care industry, Sawhny of CreditSights said.

The court probably would rule in late June. Without the mandate, the Obama administration says some provisions of the overhaul will fail, such as a ban against declining coverage to people with pre-existing health conditions.

If the law is upheld, hospital providers will probably be able to reduce bad debt, which would aid profitability, according to Neuburger.

“It’s going to be good” for earnings and cash flow, Neuburger said. “The worst-case scenario would be a rollback of the coverage expansion elements, but no associated rollback of all the reimbursement reform and the Medicare cuts that go along with that,” she said.

A committee of credit traders and investors will decide if a so-called succession event occurred with contracts on American Tower Corp., the International Swaps and Derivatives Association said on its website. A query was posted on the website for a determination after American Tower’s merger into its wholly owned American Tower REIT, Inc. on Dec. 31, followed by a change in its name to American Tower Corp.

ISDA defines a succession event as an occurrence such as a merger or consolidation in which one entity is responsible for the obligations of another entity.

Swaps linked to the Boston-based company, which leases wireless communications tower space, increased by 4 basis points today, to 254 basis points, according to data provider CMA.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE