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Hospital Issuance Should Remain Strong in 2013: Wells Fargo

CHICAGO -- Health care issuance volume should continue to rise this year despite challenges from the new federal health care law and federal deficit talks as hospitals continue to be attracted to low interest rates and strong investor demand, Wells Fargo Securities director George Huang says in a new report.

Hospitals shelved many new-money projects starting in 2008 to deal with fallout from the Great Recession. But issuance rebounded in 2012, rising to $29.2 billion, up 15% from 2011 and ending a three-year decline, Huang said in a new report “2013 Hospital Bond Volume and Spread Projections.”

The number of transactions rose to 407, up nearly 12% from 2011.

The rise is expected to continue, with Wells Fargo projecting 14% more volume in 2013, for an estimated $33.3 billion total.

Demand will continue to outstrip supply, Huang predicted.

“With low overall yields in the market, people are hungry for hospital bonds, especially long bonds, which are ‘yieldier,’” Huang said in a telephone interview. “I think yields will remain pretty low because of federal policies and that will make it an attractive environment for issuance.”

Refundings accounted for two-thirds of health care volume in 2012, but those are likely to decline over the next few years as most hospitals find they have refunded most of their debt, the report said.

New-money issuance, meanwhile, should begin to pick up now that the Affordable Care Act is a certainty and capital plans are crafted around how best to address reform, Huang said.

“Now that these hospitals have gotten past their big debt restructurings -- and if they had older high coupon debt they’ve taken advantage of this extraordinary opportunity to refinance and clean up their operations -- they’re now in a much better position to say, ‘I’m going to move forward with new money capex to make sure my hospital can survive and thrive in the new environment where the rules of the game are different,” Huang said. “Most hospital management teams are realists, and they are preparing for full implementation of the ACA.”

Hospitals that are located in states that opt out of the Medicaid expansion provision under the new law could face higher borrowing costs.

“Those hospitals [located in states that expand Medicaid] will be somewhat better off because of the benefits they will get from that participation,” Huang said. “From an investor standpoint, there will be a little more uncertainty outside of the supply-demand dynamics, though it’s going to be masked a bit by the amount of supply out there.”

Of the top 10 issues in 2012, six consisted either entirely or mostly or refunding bonds. Roughly 85% of all hospital issuance last year was in a fixed-rate mode. Hospital spreads have tightened but remain wide relative to the market and are expected to widen more in 2013, Huang said.

The report projected that credit spreads to MMD in 2013 will range from 50 basis points to 100 basis points for double-A-rated hospitals, 90 basis points to 150 basis points for A-rated hospitals, and 160 basis points to 225 basis points for triple-B rated issuers.

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