- The hospital long-term debt market is essentially frozen, say hospital advisers.
- It is unknown when widespread hospital debt buying will resume.
- Hospitals and debt buyers may approach a restarted market differently.
Roiling stock and bond markets have directly affected hospital financing efforts, even as those organizations face increasing financial effects from the coronavirus spread, say industry experts.
The U.S. spread of the coronavirus has caused record stock market plunges and broad sell offs of municipal bond funds. That has changed the views of both hospitals seeking debt financing and the buyers of such debt, but the extent of the effect is unclear.
For instance, Kevin Holloran, a senior director for Fitch Ratings, said the uncertainty has led to differing reactions by hospitals and health systems seeking long-term financing:
- Some are plowing forward with their plans to seek long-term financing from the markets
- Some hospitals have postponed planned debt offerings while they await more certainty
- Some hospitals have expended the debt they are planning to seek, given lowering interest rates
“It’s definitely not frozen, in fact some people are going in for more,” Holloran said. “And even the ones that are delaying, which are not a large percentage, are going to defer, not cancel out.”
But hospital debt advisers say that market has completely “frozen” over the last one to two weeks.
“Up until two weeks ago, the market was phenomenal” for hospital debt refinancing and new project financing, said Philip Kaplan, a managing director for Hammond Hanlon Camp (also known as H2C). But since then, “our understanding is that most healthcare bond issues have been put on hold.”
That view was echoed by Eric Jordahl, managing director of the treasury and capital markets practice of Kaufman Hall.
“As of right now, the long-term debt markets are pretty much frozen,” Jordahl said about the last week-to-10-days.
The disconnect from their view and the rating agencies may stem from hospitals continuing to approach rating agencies for rating but after receiving rating deciding to place their sales on hold, Jordahl said.
The market turbulence’s secondary effects, Jordahl said, have in turn affected fixed-rate hospital debt, including:
- Dislocation of the relationship between tax-exempt and taxable debt
- Widened credit spreads between differently rated debt
- Similar disruption has occurred in floating rate debt, he said.
How improvements may occur
No one interviewed for this article was willing to predict when the hospital debt market would stabilize.
Although Fitch does not formally track debt buyer sentiment, Holloran said it is possible that they will become more discerning, given investors’ general fear. Those changes could include:
- Reducing the number of interested buyers
- Reversing the trend of requiring little-to-no rating agency guidance on debt
Jordahl was hopeful that liquidity injections by the Federal Reserve into the money market may help “in the relatively near future.”
“We don’t really know when our markets are going to hit a point where ‘OK, we found a level, even if that level is pretty ugly, and transactions can start to get done,” Jordahl said.
One positive sign is that secondary market trading continues to occur, he said.
“But there are no primary issues that are getting done and relative value and risk pricing is just not well understood,” Jordahl said.
Kaplan expects investors to again show interest in hospital debt after they start buying U.S. Treasury bonds and then highly rated state and municipal debt.
“We don’t know when it will get better but we feel fairly certain that one of the first markets to get better will be the tax-exempt market, and investment-grade health systems will be one of the first investments to see improvement,” Kaplan said.
Kaplan urged not-for-profit health systems to take steps to protect themselves during the roiling market:
- Consider rate locks for bond issues within the next six to 36 months
- Review variable-rate demand bonds for exposure to puts
- Monitor negative fixed-rate swap valuations
- Evaluate liquidity covenants in debt agreements
- Increase and utilize lines of credit