Investors pushing hospital debt to the best returns in the $3.7 trillion municipal-bond market got a signal to buy more after the U.S Supreme Court upheld President Barack Obama’s health-care overhaul.
The ruling yesterday on the 2010 Patient Protection and Affordable Care Act left in place a mandate that Americans obtain health insurance or pay a fine, expanding the protection to millions of people and curbing hospitals’ unpaid bills. The institutions’ shares rose on the decision and muni health-care bonds are poised to follow suit, according to Matt Fabian at Municipal Market Advisors and Janney Capital Markets research.
Hospital debt has earned 13.9 percent in the past year, beating the nine other muni industries tracked by Barclays Capital and the 9.6 percent gain for the municipal market. The number of covered patients may climb 30 percent, said Charles Hachten at Nuveen Asset Management, which has $11.8 billion of hospital and long-term care bonds.
“For holders of not-for-profit hospital debt, this is good news because it will increase the number of people coming to the hospital who are insured,” Hachten, a muni health-care analyst, said from Chicago.
Health-care institutions have about $260 billion of debt, data compiled by Bloomberg show. The securities have benefited as their lower ratings and higher yields drew investors seeking to boost returns as municipal interest rates fell to the lowest levels since the 1960s. Hospital bonds have an average Moody’s Investors Service rating of four to five levels below the top, according to Barclays.
The extra yield investors demand to buy 10-year hospital debt with an A rating rather than top-grade munis fell to 1.39 percentage points this week from about 1.8 points in January, according to data compiled by Bloomberg. Some investors have bought lower-rated hospital debt anticipating Obama’s law would limit unpaid bills, Bill Black at Invesco Ltd. said last month.
Uncompensated costs totaled about $57 billion in 2008, though hospitals get most of that back through government programs, according to the Henry J. Kaiser Family Foundation.
Shares of hospital companies led by Nashville-based HCA Holdings Inc. (HCA:US) rose yesterday.
“Hospital bonds will trade up as well and that may attract new investment dollars and help drive that sector,” said Fabian, whose firm is based in Concord, Massachusetts.
A 30-year Stamford Hospital bond sold this month by the Connecticut State Health & Educational Facilities Authority traded yesterday with an average yield of 4.5 percent, or 1.35 percentage points above AAA debt, data compiled by Bloomberg show. The difference has narrowed from 1.52 points on June 8, the bonds’ first secondary-market trades.
Most hospitals have been operating as if the overhaul “would be the law of the land,” Alan Schankel, a managing director at Janney in Philadelphia, wrote in a report yesterday. As a result, the bonds may see limited shrinking of yield spreads in coming months, he said.
In April, the month after the Supreme Court heard arguments on challenges to the law, Moody’s Investors Service said in a report that losing the individual mandate “would remove health- care reform’s best feature for not-for-profit hospitals.”
The law does present challenges to hospitals on a longer horizon because it stipulates that providers face more than $150 billion of cuts in Medicare reimbursement payments, a Moody’s analyst, Mark Pascaris, wrote in a report yesterday.
Still, total returns on health-care securities are set to increase as investors will have confidence to look for higher relative yields, said Ebby Gerry, who helps manage $14 billion of municipals, including $840 million of hospital debt, at UBS Global Asset Management Inc. in New York.
“Hospitals now at least know what the rules are,” Gerry said. “And it gives investors a greater chance to be able to understand the risk.”
Following are pending sales:
NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY plans to offer $850 million of Building Aid Revenue Bonds next month, according to the city’s Office of Management and Budget. The bonds are secured by state payments to help finance public-school buildings. Moody’s Investors Service rates the credit Aa3, fourth-highest. (Added June 28)
HOUSTON plans to issue $100 million of revenue bonds as soon as next week to refund debt, according to data compiled by Bloomberg. Standard & Poor’s rates the city AA, third-highest. (Added June 29)
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