Hospital Issuance Up in 2015, Threatens Spreads: MMA

CHICAGO — Issuance of not-for-profit hospital bonds is up this year compared to recent years and is likely to stay that way, says muni research firm Municipal Market Analytics.

That means investors may not enjoy the kinds of returns they're used to seeing in a sector that faces a variety of risks, including uncertainty tied to the new federal health care law, MMA said in a comment in its Feb. 17 weekly outlook report.

All three major rating agencies maintain negative outlooks on the non-profit health care sector, warning it faces significant challenges from the Affordable Care Act as well as revenue, volume and reimbursement pressures.

With low interest rates, more hospitals are coming to market this year so far than in previous years, MMA said. Refinancings are driving part of the trend. In 2014, issuance was down more than 60%, to $15.4 billion, compared to $40 billion in 2009, the firm said. So far this year issuance is at 25% of the 2014 total, with refinancings accounting for about half of all transactions.

"Hospital issuers are benefitting from low nominal rates and tight spreads, but investors are likely not being well compensated for incremental risks," MMA said the comment, titled "Hospital Bond Spreads Threatened by 2015 Supply."

"However, even in the case of rising yields [and] falling prices, a mean reversion is unlikely unless issuance of traditional hospital bonds begins to rise enough to alleviate chronic yield and investment scarcity in the sector," the firm said. "Expectations for incremental issuance in 2015 may begin that process, but it remains too early to tell."

The firm added that high-profile distressed situations in the muni market in places like Detroit and Puerto Rico have likely boosted demand for hospital bonds, and a bondholder's treatment in a distressed hospital situation is somewhat more predictable than in other Chapter 9 scenarios.

A January MMA report examining 2014 default trends noted that nonprofit hospitals showed among the most significant increases in the number of issuers to default in 2014. Like ratings analysts and other market participants, MMA said the new federal health care law is to blame for some of the rise in hospital defaults.

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