Hospital Top Returns Await Make or Break Court Rule: Muni Credit
Investors betting President Barack Obama’s health-care law will limit hospitals’ unpaid bills have helped fuel the best returns in the municipal market. The U.S. Supreme Court may quash the rally next month.
Hospital securities have returned 17 percent in the last year, the most of 10 industries in a Barclays Capital index tracking the $3.7 trillion market for local-government debt.
The Supreme Court will probably decide in June if the Patient Protection and Affordable Care Act is constitutional. The law would force citizens to get insurance or pay a fine, the so-called mandate at the center of the case, and would expand state-run Medicaid programs to cover more of the uninsured. Some investors bought bonds of lower-rated hospitals, anticipating the requirement would cut unpaid bills, said Bill Black at Invesco Ltd., which oversees $20 billion in munis.
“There are investors out there who believed the health-care reform was going to be constitutional,” Black, a senior portfolio manager, said from Oakbrook Terrace, Illinois. “If that does happen, then those people made the right bet. If the whole thing is overturned, they’re going to own hospitals that will continue to struggle.”
Municipal interest rates close to the lowest levels since the 1960s are drawing buyers to weaker credits. Hospitals and health-care providers have an average Standard & Poor’s rating of A-, seventh-highest.
Benefit to Issuers
Hospital bonds due in 10 years with an A rating yield 3.35 percent, the lowest since a Bloomberg Fair Value index began in 1993. The penalty over top-grade securities narrowed to 1.36 percentage points last month, the least since February 2011, data compiled by Bloomberg show.
Pennsylvania’s Monroe County Hospital Authority, rated A-, was among issuers to win lower relative borrowing costs when it sold bonds in March on behalf of Pocono Medical Center.
The agency issued 20-year debt to yield 0.09 percentage points less than an index of similarly rated general obligations, data compiled by Bloomberg show. In 2007, debt of that maturity priced to yield 0.39 points above the index, the data show.
In the lead-up to the decision, Black, who helps run a high-yield fund at Invesco, said he’s buying hospitals rated BBB, two steps above speculative grade. He’s avoiding moving down the rating scale in part because of concern that weaker facilities may suffer should the mandate be struck down.
The Supreme Court in March heard arguments on challenges to the health-care law. Obama has said declaring the measure unconstitutional would amount to “judicial activism.” The justices’ questions boosted the chance that the individual mandate would be struck down by year-end to about 57 percent as of yesterday, from 34 percent on the first day of the hearings, according to InTrade.com, which offers betting on outcomes of various events.
“Yield doesn’t come free,” said Jamie Pagliocco, director of bond managers overseeing $30 billion of munis at Fidelity Investments in Merrimack, New Hampshire. “The individual mandate is essential to the overall reform. Depending on the ruling, it could either be status quo or negative” for health-care bonds.
In an April report, Moody’s Investors Service said losing the individual mandate “would remove health-care reform’s best feature for not-for-profit hospitals.” Credit risk would rise even if the rest of the law were upheld, said Moody’s, which has a negative outlook on the bonds.
“Requiring individuals to obtain insurance would reduce significantly the uncompensated care delivered by hospitals,” as well as emergency-room visits, the report said.
Uncompensated costs totaled about $57 billion in 2008, though hospitals get reimbursed for most of that through government programs, according to the Henry J. Kaiser Family Foundation in Menlo Park, California.
“The most expensive way to enter the health-care system is through a hospital’s emergency room,” said Chris Ryon, who helps manage $7.5 billion of municipals, including about $1.5 billion of hospital debt, at Thornburg Investment Management in Santa Fe, New Mexico.
At the end of fiscal 2010, 41 hospitals that weren’t part of a larger system had speculative grades from S&P, up from 38 in 2009, according to a report.
“You’re going to have good hospitals and bad hospitals,” Ryon said. “Hopefully you’ll own the hospitals that will be strong and will survive” should the law be struck down, he said.
Following are pending sales:
SAN FRANCISCO PUBLIC UTILITIES COMMISSION plans to issue about $576 million in revenue debt as soon as May 22, according to data compiled by Bloomberg. The securities mature from 2031 to 2042, the data show. Moody’s Investors Service rates the bonds Aa3, fourth-highest. The debt will be sold via competitive sale. (Added May 16)
NEW YORK CITY plans to sell $800 million of tax-free general-obligation bonds as soon as next week, according to an offering document. The refunding debt will be sold to individuals on May 21 and May 22, and issued to institutions on May 23, according to a city statement. S&P rates the bonds AA, third-highest. Bank of America Merrill Lynch will lead banks. (Updated May 16)
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