With interest rates still hovering close to zero, investors continue to search for yield in 2013.
Demand for high-yield paper is currently high due to positive net inflows to municipal bond mutual funds and benchmark yields that remain historically low. While hospitals have dominated municipal issuance during the seasonally slow opening weeks of 2013, spreads in this sector remain tight. Of the approximately $1 billion in hospital bonds issued year-to-date through Feb. 19 (whose ratings ranged from Baa1 to Aa3), the longer maturity bonds were sold at spreads inside 200 basis points over the benchmark curve.
By comparison, the long-term care sector has accounted for approximately $330 million year-to-date issuance, with ratings ranging from non-rated to A3. Primary market spreads for this year’s new long-term care issues have ranged from 130 to 450 basis points over the benchmark curve in contrast to the larger hospital sector. CCRCs have historically been the most common issuer of high-yield municipal bonds within the long-term care sector and that trend holds true so far this year.
Interactive Data classifies long-term care issuers within four subsets based on property type:
Assisted Living Facilities (ALF) are rental properties that provide supportive assistance care in addition to basic independent living services. Assistance is for activities of daily living including management of medications, bathing and dressing. Many of these facilities have some units dedicated to dementia patients along with some nursing beds.
Senior Independent Living facilities (SIL) are age-restricted multi-family rental properties that often include access to meals, recreational activities and transportation.
Skilled Nursing Facilities are accredited facilities usually reimbursed by Medicaid and Medicare. Some units can be private pay. Facilities are usually long-term and have full-time nursing care supervised by a physician.
Continuing Care Retirement Communities (CCRC) operate properties that include independent living units, assisted living units and nursing units. Payment plans vary but usually include an entrance fee.
Of approximately 1,000 long-term care facilities for which Interactive Data performs credit surveillance, approximately 40% are continuing care communities, 40% are skilled nursing facilities and the remaining 20% are assisted living facilities and independent living facilities. Approximately 5% of the long-term care facilities we follow are “distressed.” These facilities experienced financial difficulties, resulting in covenant defaults, missed payments, and draws on reserve funds.
The long-term care credit market has stabilized somewhat during the past year, with 2012 showing fewer defaults than 2011. This reflects a healthier housing market and decreased issuance of long-term debt after the financial meltdown in 2008. The low interest rate environment has helped, as well.
To be sure, 2012 witnessed some high-profile bankruptcies and bond defaults among long-term care issuers -- especially in the Chicago area -- and a few distressed projects face ongoing default risk. But the majority are stable and improving as the housing market continues to rebound, according to Dan Toboja, vice president at Ziegler Capital Markets, an active broker-dealer in long-term care sector.
Toboja says primary market spreads for non-rated startup facilities today are 125 to 150 basis points tighter than they were at the beginning of 2012, and the bonds have tightened an additional 50 to 60 basis points in the secondary market.
Ziegler’s new-issue pipeline consists of a mix of refinancings, upgrades for existing facilities, and a small number of startups. Other dealers active in the sector include Herbert J. Sims, Cain Brothers, and BB&T Capital Markets.