Hospital Debt Proves Worst Casualty in Sick Market: Muni CreditBrian Chappatta
Bonds sold by hospitals are turning into the biggest losers in the municipal market as a delay in a provision of President Barack Obama’s health-care overhaul converges with near-record withdrawals from high-yield funds.
Hospital and health-care debt has lost 3.8 percent this month, making it the market’s weakest segment, Standard & Poor’s data show. The slide marks a reversal, after the bonds beat all local borrowings in the first four months of 2013. The debt is being punished by diminished demand for high-yield munis, which have dropped 4.6 percent in July. Almost half of stand-alone hospitals are rated junk or within three levels of it, according to S&P.
Amid the worst quarter for local debt since 2010, investors pulled about $1.2 billion from high-yield muni funds in the week through June 26, the second-biggest loss since Lipper US Fund Flows data began in 1992. Then last week, the administration delayed the part of its health-care law that would fine companies for not offering workers affordable insurance.
“It’s just more uncertainty as to how health-care reform is going to work out,” said Bill Black, a senior portfolio manager in Oakbrook Terrace, Illinois, for Invesco Ltd., which oversees about $6.6 billion in high-yield munis. “You have to be very careful and very selective in terms of what speculative credits you’re buying.”
The $3.7 trillion market for local debt lost 3.1 percent last quarter, the most since the final three months of 2010. Munis joined a fixed-income selloff fueled by bets that the Federal Reserve will slow its bond buying. Investors yanked an unprecedented $9 billion from all muni mutual funds in the past two weeks, Lipper data show.
Before the declines, hospital and health-care debt had been rallying. The U.S. Supreme Court last year left in place a mandate in the Patient Protection and Affordable Care Act that Americans obtain health insurance or pay a fine, leading investors to bet that such a requirement would curb uncompensated costs and boost the systems’ finances.
The government will postpone enforcement of the employer mandate until 2015, after congressional elections, the administration said July 2. Under the provision, companies with 50 or more workers face a fine of as much as $3,000 per employee if they don’t offer affordable insurance.
Health facilities had also benefitted from the Fed’s policy of keeping its key lending rate near zero, boosting demand for weaker credits as investors sought higher yields.
In one example of a hospital issuer facing fiscal stress, Temple University Health System in Philadelphia saw its credit rank weaken last month.
S&P cut the system to BB+, one step below investment grade. The ratings company cited a “very modest market share” and the group’s reliance on Medicaid payments.
The system is among those contending with higher yields after benchmark interest rates set a 26-month high in June.
Tax-exempt bonds issued for Temple by the Philadelphia Hospitals & Higher Education Facilities Authority and maturing in July 2036 traded this week at an average yield of 5.77 percent, close to the highest since the debt’s issuance in June 2012, according to data compiled by Bloomberg.
Across the country, the California Health Facilities Financing Authority yesterday issued on behalf of the St. Joseph Health System. Debt maturing in 10 years was priced to yield 3.86 percent, about 1 percentage point more than benchmark munis. S&P rates the bonds AA-, fourth-best.
Bonds from higher-rated systems will recover faster than speculative-grade securities, said John Loffredo, co-head of Princeton, New Jersey-based MacKay Municipal Managers, which oversees $7.5 billion of local debt. Hospital and health-care borrowings will probably still outperform this year, he said.
The size of hospital and health-care deals may have contributed to the segments’ decline as individuals withdrew money from funds, said Dennis Derby, who helps oversee $34 billion of munis at Wells Capital Management in Menomonee Falls, Wisconsin. With the outflows, money managers probably turned to their easiest-to-trade holdings to sell, he said.
“If you’re a high-yield mutual fund and people are liquidating, you have no choice but to sell, and that’s when all the bids fade,” said Alan Schankel, head of fixed-income research in Philadelphia at Janney Montgomery Scott.
In the new issuance market this week, Utah and the Illinois State Toll Highway Authority are among localities offering a combined $6.5 billion.
At 2.8 percent, yields on benchmark 10-year munis are the highest this month and compare with 2.64 percent for similar-maturity Treasuries.
The ratio of the interest rates, a gauge of relative value, is about 106 percent, compared with an average of about 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.