Lower-Rated Hospitals Pay Biggest Penalty on Debt Since 2009: Muni Credit
Hospitals with low investment-grade ratings are facing their highest relative borrowing costs since 2009 amid shrinking funds from states cutting back on Medicaid and the uncertain outcome of changes to U.S. health care.
The extra yield investors demand to hold BBB rated 10-year hospital bonds over top-rated general-obligation debt rose to as much as 2.74 percentage points May 13 from 1.93 points Jan. 17, the widest since October 2009, according to Bloomberg data. The spread on AA hospital debt above the 10-year top-rated bonds widened to as much as 1.51 points May 16, a level not reached since August 2009.
Large hospitals with higher ratings will “be a lot more adept in response” and their debt is less likely to see spreads widen significantly, Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview.
Medicaid, a joint federal and state program of health care for the poor, has emerged as a battleground as governors attempt to balance their budgets. The health-care overhaul President Barack Obama signed last year limits states’ power to bump residents off Medicaid without federal permission, a provision Republicans have asked Obama to ease.
“I think it’s going to be very challenging for smaller operations to find the money to spend on information technology and modernizations to generate economies of scale,” said Schankel. “There’s more and more divergence of the mom and pop places and the big operations.”
The outlook on debt from New Jersey’s St Joseph’s Healthcare System, with the lowest investment grade of BBB-, was revised to negative on June 16 by Standard & Poor’s, which noted its reliance on state and federal funds.
By contrast, St. Louis, Missouri-based Ascension Health Credit Group, the third-biggest issuer of hospital munis, expects a “favorable market reception” to $176 million of scheduled bond remarketings between July and November, said Anthony J. Speranzo, chief financial officer in an e-mail.
“The market has seen a trend of cash outflows from the mutual funds that buy Ascension Health bonds since yields were so low, which had adversely impacted demand,” said Speranzo.
“These outflows have recently abated and we anticipate stronger investor interest, which will support an environment of lower rates in the near term.”
There may be a consolidation among the 5,000 not-for-profit hospitals across the country as larger and better-capitalized operations buy the smaller ones, said Buck Stevenson, a portfolio manager who oversees higher-yielding, tax-exempt revenue bonds for New York-based Silvercrest Asset Management Group, which manages $10 billion.
“Merger and acquisition activity will increase between hospitals and between hospitals and physicians, a development which, on balance, is a positive trend for the industry, notwithstanding the short-term implementation risk some individual health systems will face,” said Moody’s Investors Service in a Feb. 3 report, which gave the sector a negative outlook.
There’s about $310 billion of hospital municipal debt outstanding, Bloomberg data show.
Whether expanded eligibility will prove to be a burden depends on the reimbursement rate, said Sylvan Feldstein, a municipal bond analyst who helps oversee $1.6 billion in tax- exempt munis at RS Investments. He avoids buying bonds from hospitals where more than half of their revenue comes from Medicaid and Medicare, which provides health care to the elderly.
The Affordable Care Act is designed to extend coverage to 32 million uninsured people by 2019, with as many as 16 million of those under Medicaid. By 2014, eligibility for Medicaid, which serves about 60 million annually, would be expanded to all Americans with incomes up to 133 percent of the federal poverty level.
Extra federal aid under the 2009 economic stimulus helping states pay for Medicaid ends June 30. Thirty-one have proposed cuts to Medicaid and other health programs in 2012, according to data collected by the National Conference of State Legislatures.
In the broader municipal market, top-rated 10-year debt yielded 2.71 percent, the highest since May, according to BVAL data.
Following is a description of a pending sale of U.S. municipal debt:
DALLAS, the Texas city of about 1.2 million, will issue $236.3 million in refinancing bonds as soon as next week. The city’s water and sewer system will use proceeds to refinance debt issued in 2003. JPMorgan Chase & Co. will lead underwriters in the sale. (Added June 30)
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