Hos­pi­tals ben­e­fit­ing from healthy bond mar­ket

Modern Healthcare - - NEWS - By Dave Barkholz

The white-hot bond mar­ket con­tin­ues to get hot­ter. Need ev­i­dence? Look no fur­ther than the San Fran­cisco Bay area.

Kaiser Per­ma­nente raised $4.4 bil­lion through a se­ries of three bond of­fer­ings this month. That’s a record for the Oak­land, Calif.-based health plan and hospi­tal gi­ant, which plans to use the pro­ceeds to fuel ex­pan­sion, said Chief Fi­nan­cial Of­fi­cer Kathy Lan­caster. The ag­gre­gate in­ter­est rate on the A+ bonds was a stel­lar 3.8%.

Kaiser Per­ma­nente in­vestors or­dered four to five times as many of the A+ bonds as were avail­able, ac­cord­ing to Kaiser Trea­surer Tom Meier.

It’s not only Kaiser that’s tak­ing ad­van­tage of the ro­bust bond mar­ket. Just this month, Com­mu­nity Health Sys­tems grew a $700 mil­lion debt of­fer­ing to $900 mil­lion. Com­pe­ti­tion for MetroHealth’s $945.7 mil­lion of­fer­ing dropped the rate to un­der 5%.

MetroHealth, lo­cated just west of Cleve­land, raised the money to fi­nance the trans­for­ma­tion of its main cam­pus, in­clud­ing a new re­place­ment hospi­tal. Strug­gling CHS is re­fi­nanc­ing debt that was ex­pir­ing.

Cor­po­rate bond ac­tiv­ity is ex­pected to re­main ro­bust even if the Fed­eral Re­serve raises in­ter­est rates a cou­ple of quar­ter-point notches this year, ac­cord­ing to an April debt re­port by Fitch Rat­ings.

Even with a quar­ter-point in­crease in March, fed­eral bor­row­ing rates are still near a his­toric low at 1%. The gov­ern­ment will only con­tinue to raise in­ter­est rates if the econ­omy is strong, said Fitch Man­ag­ing Direc­tor Me­gan Neuburger.

What that means for hos­pi­tals is that higher in- ter­est rates would be off­set by more pa­tient vol­ume since con­sumers might feel more fi­nan­cially com­fort­able get­ting elec­tive and pre­ven­tive care.

That’s the case even for trou­bled sys­tems such as CHS with be­low-in­vest­ment-grade debt rat­ings.

“The high-yield (bond) mar­ket is healthy,” Neuburger said.

Kaiser, the na­tion’s largest in­te­grated health sys­tem with an­nual rev­enue of $71 bil­lion, needs more hospi­tal ca­pac­ity, physi­cian of­fices and tech­nol­ogy en­hance­ments af­ter adding about 2.5 mil­lion new health plan mem­bers over the past three years, Lan­caster said.

The re­cent ac­qui­si­tion of Group Health in Seat­tle and other or­ganic growth has brought Kaiser’s en­roll­ment to 11.7 mil­lion mem­bers.

Part of the rea­son this month’s of­fer­ing was so big is that Kaiser had not gone to the debt mar­kets since 2012, Lan­caster said. Typ­i­cally, it would do an of­fer­ing ev­ery other year, but the need for cap­i­tal and low in­ter­est rates caused Kaiser to put some­thing to­gether, she said.

Kaiser likes to op­er­ate with a debt-to-cap­i­tal­iza­tion ra­tio of 20% to 30%, Lan­caster said. The re­cent of­fer­ing puts the sys­tem at 28%.

In­ter­est­ingly, $1 bil­lion of the $4.4 bil­lion in bonds were des­ig­nated as “green bonds” or those that ap­peal to funds and in­vestors that look for en­vi­ron­men­tally or so­cially friendly or­ga­ni­za­tions to in­vest in, Lan­caster said.

Kaiser re­ceived that des­ig­na­tion due to its new en­vi­ron­men­tally friendly hospi­tal in San Diego that opened two weeks ago, she said.

MetroHealth re­ports that it had 122 banks, funds, firms and in­di­vid­u­als put in or­ders for its hospi­tal bonds.

“Not only is this an im­por­tant val­i­da­tion of the suc­cess we’ve earned with our strat­egy, re­cent growth and op­er­at­ing per­for­mance im­prove­ments, it’s proof of the in­dus­try’s be­lief in MetroHealth and the path we’re tak­ing,” said Dr. Akram Boutros, MetroHealth CEO.

The health sys­tem is us­ing the pro­ceeds to con­struct a new 12-story, 270-bed re­place­ment hospi­tal on its main cam­pus as well as a new cen­tral util­ity plant and park­ing garage, among other projects.

Cor­po­rate bond ac­tiv­ity is ex­pected to re­main ro­bust even if the Fed­eral Re­serve raises in­ter­est rates a cou­ple of quar­ter-point notches this year, ac­cord­ing to an April debt re­port by Fitch Rat­ings.

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