In­ter­est rate hike could push hos­pi­tals to bor­row now

Modern Healthcare - - NEWS - By Me­lanie Evans

The easy money of the last seven years is over. Health­care bor­row­ers face new cal­cu­la­tions for when—and how much—to bor­row.

The Fed­eral Re­serve raised the short-term in­ter­est rate last week for the first time in nearly a decade, and by do­ing so, set off some skit­tish­ness about how swiftly bor­row­ing costs may rise. That could push some hos­pi­tals into the mar­ket to get ahead of fu­ture rate in­creases. But it could also mean tighter credit for heav­ily in­debted hos­pi­tal op­er­a­tors if anx­ious in­vestors pull back from buy­ing junk bonds.

Short-term in­ter­est rates, which the Fed­eral Re­serve held near zero for seven years to stim­u­late the econ­omy, in­creased by 0.25 per­cent­age points. The cost of bor­row­ing re­mains low, but it is fi­nally ris­ing.

As she an­nounced the rate hike, Fed­eral Re­serve Chair­woman Janet Yellen said fu­ture in­creases would fol­low in “a pru­dent and, as we have em­pha­sized, grad­ual man­ner.” She also stressed that the ini­tial boost to bor­row­ing costs was mi­nor and would be closely mon­i­tored. “I think it’s im­por­tant not to overblow the sig­nif­i­cance of this first move,” she said.

But for not-for-profit hos­pi­tal bor­row­ers that have de­layed cap­i­tal projects, the wide­spread ex­pec­ta­tion that rates will rise fur­ther could com­pel bor­row­ers to come to mar­ket now to get ahead of the Fed’s next ac­tion.

“We’ve all talked about it, and now it’s go­ing to hap­pen,” said Steve Kennedy, a se­nior man­ag­ing di­rec­tor at in­vest­ment bank Lan­caster Pol­lard, who works with not-for-profit helath­care or­ga­ni­za­tions and se­nior­liv­ing bor­row­ers.

How­ever, hos­pi­tals hop­ing to avoid higher bor­row­ing costs could end up push­ing in­ter­est rates higher as they en­ter the mar­ket. That’s be­cause in­vestors can de­mand higher in­ter­est rates when more bor­row­ers com­pete for their cash.

“That really drives what the av­er­age hos­pi­tal is go­ing to pay, way more so than whether the Fed is go­ing to raise in­ter­est rates,” said Pierre Bo­gacz, a man­ag­ing di­rec­tor at HFA Part­ners, Tampa, Fla.

Not much will change im­me­di­ately for in­vestor-owned health­care com­pa­nies, which have al­ready cap­i­tal­ized on the ex­tended pe­riod of cheap bor­row­ing to re­fi­nance debt and bor­row for merg­ers and ac­qui­si­tions, said Me­gan Neuburger, a man­ag­ing di­rec­tor for Fitch Rat­ings. It’s “prob­a­bly busi­ness as usual tomorrow,” she said as the Fed an­nounced the rate hike.

But there may be tur­moil ahead for pub­licly traded health­care com­pa­nies, which gen­er­ally have credit rat­ings that in­vestors con­sider “spec­u­la­tive” or “junk.” That in­cludes Com­mu­nity Health Sys­tems, HCA, Life­Point and Tenet Health­care Corp.

In­vestor anx­i­ety has roiled junk bond mar­kets in re­cent weeks as de­faults have started to edge up­wards from his­toric lows, said Christina Pad­gett, di­rec­tor of lever­aged fi­nance re­search at Moody’s In­vestors Ser­vice. “It was kind of eye­open­ing,” she said. “It made the whole mar­ket jit­tery.”

Plung­ing oil prices have in­creased de­fault rates from oil and gas com­pa­nies this year. The de­fault rate for U.S.

“Fu­ture in­creases will fol­low in a pru­dent and, as we have em­pha­sized, grad­ual man­ner. I think it’s im­por­tant not to overblow the sig­nif­i­cance of this first move.” JANET YELLEN Fed­eral Re­serve chair­woman

junk bonds in Novem­ber was 3%, based on the prior 12 months, Moody’s data show. That’s com­pared with 1.7% for the pre­vi­ous year.

Con­cern that the Fed­eral Re­serve’s higher rates will fur­ther dis­tress heav­ily lever­aged com­pa­nies has added to in­vestor anx­i­ety.

Still, the health­care sec­tor is grow­ing, and its de­mand for debt de­pends less on ups and downs in the econ­omy than in other in­dus­tries. Both of those fac­tors make health­care com­pa­nies more at­trac­tive to in­vestors, Pad­gett said.

Most hos­pi­tal com­pa­nies have al­ready moved ahead of the rate hike to ex­tend fa­vor­able rates, said Frank Mor­gan, a health­care an­a­lyst at RBC Cap­i­tal Mar­kets.

That means for-profit hos­pi­tals have less need to bor­row dur­ing the cur­rent tur­moil. HCA and Tenet have roughly 5% and 1%, re­spec­tively, of their bonds and notes that must go to mar­ket or be re­paid by the end of next year, Fitch data show. Com­mu­nity Health Sys­tems has no bonds that must be re­fi­nanced or paid off be­fore 2017.

But Com­mu­nity Health Sys­tems will en­ter the mar­ket with a planned spinoff of 38 hos­pi­tals into a new com­pany called Quo­rum Health. How in­vestors re­spond will de­pend on the tim­ing of the spinoff, how much debt the com­pany will seek and the out­look for the small and ru­ral hos­pi­tals that make up Quo­rum’s oper­a­tions, Neu­berger said.

And the mar­ket’s over­all ap­petite for junk bonds (which is likely how Quo­rum’s debt will be rated) de­pends on whether re­cent in­vestor anx­i­ety re­flects tem­po­rary jit­ters or more per­ma­nent aver­sion to risk, said Bon­nie Baha, head of the global de­vel­oped credit group for Dou­ble-Line Cap­i­tal, which man­ages roughly $80 bil­lion in as­sets.

In­vestors have so far flooded back to junk bonds af­ter re­cent bouts of un­cer­tainty. “Ev­ery dip is seen as a buy­ing op­por­tu­nity,” she said.

That may change now that the Fed­eral Re­serve is mov­ing to end its ex­tra- or­di­nary ef­forts to prop up the econ­omy’s re­cov­ery. And com­pa­nies are highly lever­aged af­ter as­sum­ing piles of debt dur­ing the ex­tended stretch of easy money.

Given all of th­ese fac­tors, in­vestors may fi­nally lose some ap­petite for risk, Baha said. “Ev­ery­body is wait­ing for the other shoe to drop.”

Not much will change im­me­di­ately for in­vestorowned health­care com­pa­nies, which have al­ready cap­i­tal­ized on the ex­tended pe­riod of cheap bor­row­ing to re­fi­nance debt and bor­row for merg­ers and ac­qui­si­tions. ME­GAN NEUBURGER Man­ag­ing di­rec­tor Fitch Rat­ings

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