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.