Blog | FASB and GASB Rules and Guidelines

Analysis: Health systems likely to continue to issue bonds at a feverish pace

Blog | FASB and GASB Rules and Guidelines

Analysis: Health systems likely to continue to issue bonds at a feverish pace

  • Organizations are trying to lock in the current historically low taxable and tax-exempt interest rates, according to a Modern Healthcare article.
  • Large issuances are typically more strategically timed as to avoid another large offering, but rates right now are too good to miss.
  • Another reason not mentioned in the Modern Healthcare article for the continued bond issuances could be the impact of FASB finalizing its proposal on Debt Topic 470.

Modern Healthcare reports that “organizations are trying to lock in the current historically low taxable and tax-exempt interest rates. They're also turning to taxable debt now that most tax-exempt advance refundings, a popular refinancing technique, aren't allowed.”

In the article, Kevin Holloran, senior director at Fitch Ratings, said, “Kaiser Permanente seemed to kick off the action in October with its $1 billion taxable issuance.”

“Since then, health systems of all sizes have announced their own offerings, including Cleveland Clinic, Memorial Hermann, Advocate Aurora Health, RWJ Barnabas Health, Adventist Health and New York-Presbyterian,” according to Modern Healthcare. “Back in August, CommonSpirit Health sold $6.46 billion worth of tax-exempt and taxable debt, most of that restructuring existing debt previously issued by the two systems that formed Chicago-based CommonSpirit, Catholic Health Initiatives and Dignity Health.”

“A few years ago, systems would have tried to stagger their issuances so they didn't overshadow one another and had enough time to market the debt to potential investors,” said Halloran in the article. “It's like five people trying to get through a door at once."

Takeaway

As noted, these large issuances are typically more strategically timed as to avoid another large offering. However, the demand for bonds is very high and these systems are highly rated, stable organizations, making it a good match for the issuer and buyers.

Furthermore, the taxable and tax-exempt rules along with the interest rate spread allow systems to use the capital raised in a more flexible way (refinancing, other business ventures, etc.). It also saves them a lot of time and headache on the issuing side, as there are plenty of hurdles with tax-exempt debt.

I’d expect this trend to continue as the rates are too good to miss.

Another reason not mentioned in the Modern Healthcare article could be the impact of the Financial Accounting Standards Board finalizing its proposal on Debt Topic 470, which reclassifies Variable Rate Debt Obligations (VRDOs) to current debt (from non-current). This creates debt covenant issues for health systems heavy into VRDOs, and so getting out of these instruments into long-term, fixed-rate debt is a solid option to avoid the complications of this potential accounting change.

About the Author

Chuck Alsdurf

is HFMA’s director of healthcare finance policy, operational initiatives.

Advertisements

Related Articles | FASB and GASB Rules and Guidelines

How To | FASB and GASB Rules and Guidelines

An 8-step checklist to help CFOs assess accounting alternatives

Finance leaders of not-for-profit healthcare organizations should follow eight steps when considering whether to adopt the accounting alternatives made available to their organizations by the FASB's Accounting Standards Update 2019-16.

Article | FASB and GASB Rules and Guidelines

Not-for-profit healthcare organizations should understand the benefits and risks of FASB's new alternative accounting approach

A FASB Financial Accounting Standards Update now allows not-for-profit healthcare entities to adopt an accounting alternative previously available only to non-public business entities, but the not-for-profits may find it more beneficial not to do so.

How To | FASB and GASB Rules and Guidelines

Acquisition accounting basics to consider

The FASB’'s Accounting Standards Codification Topic 850, Business Combinations, states that such combinations generally involve five basic steps.

How To | FASB and GASB Rules and Guidelines

Defining Finance and Operating Leases Under the New Lease Accounting Standard

The FASB’s Accounting Standards Update (ASU) 2016-02 – Leases (Topic 842) describes how to determine whether a lease should be classified as an operating or a finance lease.