Las Vegas — Emerging slowly from the financial crisis, hard-hit nonprofit health care borrowers are gaining ground in market access and on credit spreads. However, they face tougher disclosure demands and must rethink strategies to lure investors going forward, especially given the looming uncertainties associated with national health care reform.
“I think disclosure is the big [issue]” and not just for new issues in the primary market, but ongoing for investors interested in purchasing a borrower’s bonds in the secondary market, said Bedford Boyce, senior vice president in the investment banking division of Loop Capital Markets LLC. “I think it is a shift that is permanent.”
Boyce was among a panel of health care market participants who reflected yesterday during The Bond Buyer’s 10th Annual Nonprofit Hospital Finance Conference on the impact of the financial turmoil that began in 2007 as the auction market securities faltered and climaxed with the crisis that followed the Lehman Brothers bankruptcy.
While even higher-rated government credits were temporarily frozen out of the market, health care borrowers who were still in the process of restructuring their failing ARS were especially hard hit and early in the year only the highest rated credits could attract risk-averse investors.
Several representatives of investment management firms echoed Boyce’s position, saying it would serve hospitals well in attracting, building and keeping an investor base by improving disclosure. Investors said they would like financial updates to be more accessible, updated in a more timely fashion and executive managers made available to answer questions.
If investor appetite for risk has increased of late, borrowers remain hesitant to veer from anything but a more traditional structure especially as credit spreads for the health care sector — though narrowing — remain volatile.
“Just keep it simple” with fixed-rate structures, said panelist Mark Melio, a former head of public finance banking at JPMorgan who recently started the health care advisory firm Melio & Co. “I think it’s going to take time for interest in alternative approaches to return.”
Health care issuers hold an array of options to improve their market access while managing and balancing risk and borrowing costs going forward.
Borrowers that deploy new financing strategies “are going to be the ones that are going to rise to the top,” said Dennis Tupper, vice president at Deutsche Bank Municipal Structuring.
That’s because given all the health care issuance now in a floating-rate mode, the investment community won’t be able to swallow all of it in the form of fixed-rate paper.
Borrowers should consider the commercial paper market, which remains an “active and liquid” market, said panelist Anthony Taddey, a managing director at Lancaster Pollard. “I think that’s going to be a trend.”
Panelists said health care borrowers should not write off the use of derivatives. Swaps have fallen out of favor as issuers rushing to convert their insured variable-rate bonds held by liquidity providers following failed remarketings faced added costs to terminate swaps tied to the deals due to negative market valuations.
Tupper recommended that borrowers consider shorter-term swap agreements that in case of termination are not as severely affected by fluctuations in mark-to-market valuations.
Issuers interested in benefiting from lower floating rates without the risk and costs of bank liquidity can issue fixed-rate bonds and use swaps to convert to a synthetic floating rate, Boyce suggested.
While the industry is still reflecting on recent struggles and how to move forward, the impact of the national health care reform bills now before Congress looms large.
“None of us quite know,” Taddey said of the affect the final version will have on hospital credit quality and financing structures.
For lower-rated and unrated hospital credits the road to market entry remains the rockiest. Boyce said he believes the market’s opening up will trickle down to lower-rated credits, “just not as fast as everyone would like.”
Panelists said that for some, private placements may be the answer, along with various enhancement programs offered by the federal home loan banks and federal government for eligible critical-care and rural-access hospitals.
The financial turmoil strained the long-standing and often close relationships many borrowers had with their investment banks. “It clearly shook the foundation of our business and our relationships,” Melio said of the period in which borrowers clamored for credit support — a scarce commodity given the strain on banks’ balance sheets from writedowns. Melio added that he believes relationships are on the mend.
Borrowers should take more care going forward to diversify their relationships and use of products among firms, Tupper recommended. The aime was to avoid a “massive concentration of risk” that resulted in the past when borrowers often used the same investment bank as its underwriter, liquidity provider and swap counterparty as the firms promoted themselves as one-stop shops.
