Hot streak con­tin­ues for bond mar­ket

Modern Healthcare - - NEWS - By Dave Barkholz

Op­er­at­ing out of build­ings that are 50 to 100 years old, MetroHealth is due for a ma­jor face lift. The Cleve­land-based sys­tem though faces some sig­nif­i­cant fi­nan­cial con­straints. Serv­ing many of the poor in Cuya­hoga County, 50% of its rev­enue comes from Med­i­caid; it also cares for a large unin­sured pop­u­la­tion. The county-run health sys­tem gets just 3% of its funds from sub­si­dies.

So when time came to raise money for a new 12-story, 270-bed mod­ern hos­pi­tal on its main cam­pus, MetroHealth turned to a boom­ing bond mar­ket. In fact, MetroHealth found so much in­vestor ap­petite this month for an out­sized $946 mil­lion of­fer­ing that the com­pe­ti­tion for the bonds drove down the in­ter­est rate to less than 5%. MetroHealth had four to five times as many bids for its bonds than the debt avail­able to buy, CEO Dr. Akram Boutros said.

The re­place­ment hos­pi­tal is sched­uled to open in 2022 next to a new 85-bed in­ten­sive-care unit tower that opened with op­er­at­ing room suites in July. MetroHealth used op­er­at­ing cash­flow for the bulk of that $95 mil­lion ICU tower.

“It’s a great time to go to mar­ket,” said Pierre Bo­gacz, man­ag­ing part­ner of health­care fi­nan­cial ad­viser HFA Part­ners in Tampa, Fla. Hos­pi­tal bond of­fer­ings have ex­ploded over the past year de­spite a lull in Jan­uary and Fe­bru­ary.

To­tal hos­pi­tal is­suance of tax-ex­empt, fixe­drate rev­enue bonds has reached a pre-re­ces­sion high of $27.7 bil­lion in the 12 months end­ing June 30 with more than a month to go, HFA Part­ners found. That com­pares with a strong $21.1 bil­lion in the pre­vi­ous 12 months and $20.5 bil­lion in the pe­riod be­fore that. By con­trast, hos­pi­tal is­sues to­taled only $9.4 bil­lion in the 12 months ended June 30, 2014.

Bo­gacz said the mar­ket is be­ing fu­eled by a con­ver­gence of in­vestors chas­ing the fairly safe, solid re­turns that hos­pi­tal bonds of­fer as hos­pi­tals shake off the re­ces­sion to raise cap­i­tal for de­ferred main­te­nance and the on­go­ing pa­tient shift in the in­dus­try to am­bu­la­tory care.

Like MetroHealth, many health sys­tems are also look­ing to up­date their aging in­fra­struc­ture. Fitch Rat­ings in a Septem­ber re­port noted that hos­pi­tals with lower bond rat­ings had seen the aver­age age of their fa­cil­i­ties grow from about 10.5 years in 2008 to 11.5 years in 2015 be­cause they had put off re­plac­ing them. Growth plans from years ago, im­me­di­ately af­ter the boom of the Af­ford­able Care Act, are now be­ing im­ple­mented.

More­over, rates re­main near his­toric lows, mak­ing it at­trac­tive to bor­row now, he said. Highly rated Kaiser Per­ma­nente, which car­ried an A+ rat­ing into its re­cent bond of­fer­ing, raised a record $ 4.4 bil­lion in three si­mul­ta­ne­ous is­suances at a stel­lar in­ter­est rate of 3.8%.

Chicago-based Pres­ence Health was able to com­plete a $1 bil­lion bond of­fer­ing in Au­gust, de­spite se­vere op­er­at­ing losses that the sys­tem cor­rected just months be­fore the is­suance. The money was used to re­fi­nance older bonds, giv­ing Pres­ence Health the breath­ing room it needed to con­tinue a turn­around that saw the sys­tem im­prove to break even six months af­ter a $186 mil­lion op­er­at­ing loss in 2015, CEO Mike En­gle­hart said.

Both MetroHealth and Pres­ence went into their of­fer­ings with bond rat­ings barely at in­vest­ment grade.

Bo­gacz said hos­pi­tals might be mo­ti­vated to is­sue bonds now be­fore the health­care mar­ket changes un­der a re­peal of the Af­ford­able Care Act.

Be­yond fi­nan­cial un­cer­tainty, many hos­pi­tals have been study­ing how quickly pa­tient vol­umes were mov­ing out of the hos­pi­tal to am­bu­la­tory set­tings be­fore spend­ing big on new pa­tient tow­ers that might not be needed in the fu­ture, said Ryan Freel, se­nior vice pres­i­dent at health­care fi­nan­cial ad­vis­ing com­pany Kauf­man, Hall & As­so­ci­ates.

Growth plans from years ago, im­me­di­ately af­ter the boom of the Af­ford­able Care Act, are now be­ing im­ple­mented.

Hos­pi­tal bond boom Tax-ex­empt fixed-rate rev­enue bonds is­sued by hos­pi­tals dur­ing 12-month pe­ri­ods end­ing June 30.

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