The 2006 healthcare bond volume is strong despite significant declines since 2005 - a year that saw record numbers in borrowing for healthcare organizations and $40 billion in issuance. Last year’s gains were up almost a third over 2004, but the current numbers are slightly ahead of those from before last year.
Fitch Ratings’ Public Finance report for the nine months ending September 30, 2006 indicates that healthcare bond volume has fallen 11.5 percent from the same period last year. In the first nine months of 2006, $23.9 billion in healthcare bonds have been issued. While the number of issuances has declined, healthcare bonds now make up 9.1 percent of total municipal bonds, up from 8.7 percent over the same period last year.
Drivers to healthcare bond volume in 2006 include hospital construction projects, low interest rates that have led to increased borrowing and a flattened yield curve that has kept its shape for more than a year.
Thomas Whalen, senior vice president and healthcare group head of Lehman Brothers, identifies hospital construction projects as the largest modern driver to borrowing. Whether for new patient towers or entire facilities, “a lot of what is driving bond volume is the tremendous pent-up capital need of hospitals,” he said.
This year has seen many healthcare organizations refinancing their existing debt. “This low rate environment has persisted,” said Whalen. Healthcare organizations “are taking advantage of the flattened yield curve.”
The numbers for 2006 may also reflect tight credit spreads, which can help lower-rated hospitals in the area of debt issuance. Many BBB hospitals have issued debt at lower rates while premiums are narrow, said Whalen.
In 2007, healthcare bond volume growth may be affected by further construction projects as hospitals upgrade facilities to meet IT standards. According to Whalen, the flattened yield curve may endure.
“By this point in late ‘06, that market dynamic hasn’t changed much as a whole,” he said. “We’re already seeing that pipeline building for 2007.”