Health care issuers will continue to take advantage of the increased access to affordable financing through the municipal market in 2002, as the sector further distances itself from the negative effects from the Balanced Budget Act and poor strategic ventures in the late 1990s, according to a Merrill Lynch & Co. report released last week.
In the report, Clare Curley, a health care analyst and director of municipal research at the firm, predicted $20 billion in issuance in 2002, after outpacing expectations by approximately 21% in 2001.
"While the market was not as active as the exceptional 1998 year, 2001 supply and performance were stable for the most part and extended beyond the detrimental post-Balanced Budget Act experience for another year," Curley wrote in the report. The Balanced Budget Act of 1997 cut federal reimbursements to health care providers.
"As the credit picture and investor community came back into health care bonds, the activity generated price stability, which aided total return performance," she wrote.
While 2001 municipal health care total return was about 30%-40% of that in 2000 -- when health care began the year with particularly low credit perceptions -- it outperformed the corporate bond market's bumpy year and outpaced the general municipal market by almost 100 basis points, according to Curley.
Triple-B health care credits total return was 12.53% last year, benefiting the most from improving credit quality, spread tightening, and an investor pursuit for high-yielding paper.
The Center for Studying Health System Change, which determined a 7.2% overall increase in per capita health care spending in 2000, also recorded a 7.7% per capita increase through March 2001, illustrating the escalation of costs to support more universal and sophisticated delivery of services, according to the report.
While the major rating agencies also noted some improved credit fundamentals, they have urged caution with respect to public and private reimbursement policy, the sector's ability to finance growth projects without completely leveraging sensitive balance sheets, and continuing cash crises. Fitch has a negative outlook for the sector, while Moody's Investors Service and Standard & Poor's have a stable outlook.
While health care downgrades still outpace upgrades, some hospitals bypassed possible opportunities for upgrades, opting instead to issue more debt for projects needed to meet patient demand or update facilities, according to Standard & Poor's analyst Martin Arrick.
