Bloomberg News

Bonds Wall Street Said Don’t Buy in ’12 Reaped 15%: Muni Credit

January 08, 2013

Debt of a Florida hospital rated three steps above junk bucked looming Medicare cuts to earn 15 percent tax-free in 2012, about seven times the gain on Treasuries and double the broader municipal market.

Twelve months ago, this was the type of security that investors such as Pacific Investment Management Co., which runs the world’s largest bond fund, and UBS AG said to avoid in favor of higher-rated health-care credits. Hospital bonds ranked BBB, the second-lowest investment grade, are coming off their best annual performance in three years, according to Bank of America Merrill Lynch data.

Obligations of BBB health-care providers wound up earning 13.9 percent in 2012, after the U.S. Supreme Court in June upheld President Barack Obama’s health-care overhaul. The law mandates that Americans obtain health insurance and also includes cuts to Medicare reimbursements.

“A lot of people just saw headline risk and moved away,” Daniel Solender, who helps manage $17 billion of munis at Lord Abbett & Co. in Jersey City, New Jersey, said about hospital bonds. “A lot of hospitals are well positioned and well managed and they’re there for the long term.”

Risk Year

Martin Memorial Medical Center serves the Port St. Lucie area on Florida’s east coast, about 112 miles (180 kilometers) north of Miami. It’s rated Baa1 by Moody’s Investors Service, three levels above speculative grade.

The hospital’s bonds benefitted last year from investors taking more risk in return for higher yields as municipal interest rates sank, said Solender, who holds Martin Memorial debt. Yields on 20-year general obligations set a 47-year low of 3.27 percent Dec. 6, according to a Bond Buyer index.

Martin Memorial bonds issued in January 2012 and due in November 2042 earned 15 percent last year, based on BVAL prices and assuming no reinvestment yield. The obligations were among BBB credits highlighted for their 2012 gains in a November report by JPMorgan Securities LLC.

Treasuries gained 2.2 percent last year and the $3.7 trillion muni market earned 7.3 percent, Bank of America data show.

Spread Narrows

The extra yield investors demand to hold BBB munis compared with top-rated securities shrank to as little as 1.66 percentage points last year, the least since 2008, data compiled by Bloomberg show.

“The high-yield muni market is so thin,” said Phil Condon, who helps oversee about $26 billion, including Martin Memorial bonds, as head of munis for Boston-based DWS Investments. “When demand picks up, investors start looking around and there’s not much to choose from, so they tend to bid up the price of these deals.”

Yet not all investors participated in buying lower-rated health-care debt because the segment faces potential federal reimbursement changes. Moody’s Investors Service has had a negative outlook on health-care since November 2008, according to Lisa Goldstein, an analyst at the company.

“Reimbursement will remain under pressure from all sources, and revenue growth will remain low by historical standards,” Moody’s analysts wrote in an August report.

Pimco Preference

Before the start of 2012, Pimco upgraded its hospital-bond holdings by buying debt rated at least A1, which is fifth- highest, and selling lower-rated credits, Joe Deane, head of munis for the asset manager in New York, said in February. The company manages $66 billion of munis. He didn’t immediately respond to a call and e-mail yesterday.

UBS Global Asset Management Inc. by February had limited holdings of hospital bonds to 4 percent, Ebby Gerry, the company’s head of munis in New York, said at the time.

Gerry said yesterday that UBS Global still holds about the same amount, and prefers health-care debt graded A and AA. He oversees $15 billion of munis. Hospital debt rated AA earned 9.8 percent last year, also beating the broader market, Bank of America data show.

U.S. analysts at UBS AG, the biggest Swiss bank, also opted for fiscally stronger and larger health-care systems in research a year ago.

“We advise extra caution when making direct investments in hospital bonds, favoring highly rated issuers and large multistate systems over single-site facilities,” UBS analysts led by Thomas McLoughlin said in a January 2012 report.

The bank repeated the view in October research, and in a November report said it was “cautious on the outlook for smaller single-site hospitals.”

Expansion Plan

Martin Memorial has a combined 344 beds at two hospitals and is building another 90-bed facility, according to its website. It has a 73 percent share of its primary service area, according to a Moody’s report.

Yet Medicare accounted for 60 percent of gross patient revenue in 2012, one of the highest among credits Moody’s rates.

“This is one that is on the low end of the investment- grade sector, so there’s a lot of uncertainty, but they have a strong market share,” Solender said.

In trading yesterday, benchmark 10-year munis yielded 1.81 percent, the lowest since Dec. 31, Bloomberg Valuation data show.

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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