California Hospitals Issue $900 Million Amid Record Outflows: Muni Credit
California’s Sutter Health, which serves patients in more than 100 of the state’s cities and towns, is selling $900 million of tax-exempt debt in the week’s biggest deal after record outflows from mutual funds.
Investors took about $4 billion from U.S. municipal-bond funds in the week ended Jan. 19, the 10th straight week of outflows and the most since Lipper U.S. Fund Flows started compiling the data in 1992. Withdrawals have totaled $20.6 billion since the week ended Nov. 17, according to Lipper, a Denver-based research company.
Yields on 30-year AA rated hospital revenue bonds rose 2 basis points, or 0.02 percentage point, to 5.75 percent on Jan. 20, the highest since June 26, 2009, according to a Bloomberg Fair Market Value index. Sutter’s debt carries ratings of Aa3 from Moody’s Investors Service and AA- from Standard & Poor’s and Fitch Ratings, all fourth-highest.
“Health-care bonds of any type are under a lot of pressure right now,” even those of well-regarded Sutter, said Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., which specializes in the state’s securities.
The Sacramento-based health system issued $878 million in tax-exempt debt in April 2007, with bonds maturing in November 2042 sold at 102.83 cents on the dollar and yielding 4.63 percent. The securities traded Jan. 21 at an average price of 80.94 cents on the dollar and yielded 6.41 percent. Yields and prices move inversely.
“We have our eye on the market,” said Joe DeAnda, a spokesman for California Treasurer Bill Lockyer. “Whatever it looks like next week, we’ll work to get the best deal possible for Sutter. We think the Sutter name will help.”
The system includes 31 acute-care hospitals, four skilled nursing facilities and five medical foundations, concentrated within five regions in the northern part of the state, Moody’s said in a Jan. 13 report.
The California Health Facilities Financing Authority will offer $575 million of Sutter’s debt this week. The other $325 million will be offered through the California Statewide Communities Development Authority.
“It’s a big deal,” John Cummings, who manages $12 billion as an executive vice president for Newport Beach, California- based Pacific Investment Management Co., said in a telephone interview. “They are putting it at an attractive rate to draw investor interest.”
Long-term yields will be about 6.25 percent, Cummings said.
Rates on tax-exempts maturing in 30 years fell 14 basis points to 4.94 percent last week, the biggest slide since the week ended Nov. 26, according to a Bloomberg Valuation index. In contrast, 30-year Treasury yields jumped as much as 10 basis points during the week, touching an almost nine-month high on Jan. 20.
Crossover buyers, investors who typically buy taxable corporate bonds, were attracted to relatively cheap municipal debt, spurring a rally that held down yields last week even as funds had outflows, John Hallacy, Bank of America Merrill Lynch manager of municipal research in New York, said in a Jan. 21 research note.
“We would likely need to see sustained support on the long end of the curve to stem the large flows out of mutual funds,” Hallacy said. “While the new-issue calendar remains very light in January, mounting supply will eventually test the market.”
States and municipalities are slated to borrow about $6 billion in the next 30 days, the lowest since Jan. 4, according to the Bloomberg 30-day visible supply index. Comparative supply totals were $11.9 billion on Jan. 22, 2009, before the advent of Build America Bonds, and $10.3 billion on Jan. 22, 2010.
Sutter Health revenue in 2009 was $8.8 billion, the largest of any single-state health-care system in Moody’s portfolio, and larger than many multi-state systems, Brad Spielman and Daniel Steingart, Moody’s analysts, wrote in their report.
Following are descriptions of pending sales of U.S. municipal debt:
FAIRFAX, the most-populous county in Virginia according to the U.S. Census Bureau, plans to sell $192 million in tax-exempt general-obligation bonds through a competitive sale this week. The bonds, which mature serially from April 2012 to April 2031, are rated AAA by Fitch and will fund various public improvements. (Added Jan. 20)
COLUMBIA UNIVERSITY, the New York City Ivy League college that enrolled more than 27,600 students as of October 2010, plans to sell $300 million in tax-exempt debt this week through the Dormitory Authority of the State of New York to reimburse expenses from previous capital projects and to finance future projects. The revenue bonds are top-rated by Moody’s. Morgan Stanley will market the securities. (Added Jan. 24)
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