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Bond Growth Anticipates Tax Reform
According to figures on selected use of proceeds
categories for tax-exempt
financings during the first half of 1985, resource recovery bonds ballooned in volume by 224 percent over the
first half of last year, industrial development bonds (IDBs) jumped by 219 percent in volume, and housing
bonds increased in total volume by 195 percent. By contrast, health care financings rose only 27 percent in
total volume during the same period last year to $5.3 billion in 1985, ranking eighth in a listing of nine
selected categories of tax-exempt
of all types represented 62.4 percent of all tax-exempt
securities during the first half of 1985--or almost $41.9 billion of more than $67.1 billion total
volume. Health care financings--including revenue bonds, general obligation bonds, and IDBs--represented
less than 8 percent (more than $5.3 billion) of the total volume during the first half, compared with 9.5
percent (more than $4.1 billion) of total volume one year earlier.
hospital revenue bonds totaled about $4.56 billion during the first half of 1985, according to
preliminary figures from Prescott, Ball & Turben, Inc., New York City, or more than 10 percent of all
revenue bonds during that period. All other figures were supplied by Securities Data Co., Inc., New York
Goldman, Sachs & Co., New York City, and Merrill
Lynch Capital Markets, New York City, led in both the senior managers only and the senior and comanagers
categories in terms of the total volume of tax-exempt
health care financings during the first half of this year (see tables 1 and 2). Three of the 10 largest
health care issues during the first half were for equipment loan pools, six were variable rate
financings, and eight of the 10 carried some form of bond insurance (see table 3). The rankings of
investment banking firms and top 10 issues were provided by Securities Data. Total volume and firm
rankings were based on a compilation of underwritten financings with aggregate par amounts of $5 million
or more. Private placements were excluded.
"Last year, the volume was heavy," but the volume of health care issues will increase even
more dramatically this autumn and winter, predicts Jud Bergman, an associate with the Chicago office of
John Nuveen & Co., Inc. "We're the busiest that we've ever been," says Bergman, adding that his
office has 23 health care financings scheduled from September through December, "which is more than we
did all last year."
anticipated tax reform bill "scares some people, but the fear that advance refunding bonds will
be severely restricted in use is more responsible for the rush to issues than the fear of the elimination
financing for hospitals," Bergman says. Refundings of all kinds represented $1.52 billion during the
first half of 1985, according to preliminary figures from Prescott, Ball &
Earlier this year, Tim Schwertfeger, Nuveen's vice-president and national director of health
care practice, had predicted that "most of the capital that will be needed in health care in the coming
years will be consolidation capital." Specifically, that means more advance refundings, Bergman observes,
and advance refundings are the kinds of issues that involve arbitrage benefits. The expectation is that
the administration will push to have arbitrage benefits eliminated or curtailed.
During the first half of this year, "there's been very little new project money" among
hospital issues, Bergman notes. Perhaps "20 percent to 25 percent of issues represent refinancing to
insure greater flexibility in the future," and that includes replacing restrictive covenants. "Another
one-third of the issues went to fund prospectively hospital capital investment or capital improvement
items," he adds.
Because of the
enormous supply of revenue bonds in general, "the interest rates on the tax-exempt
revenue bonds haven't dropped as greatly as those on taxable bonds have. As a result, the spread between
the taxable and tax-exempt
bonds has narrowed significantly," Bergman says. Interest rates on taxable bonds are higher than
"Interests rates are terribly attractive right now, on a historical basis," says Peter
Schmitt, director of fixed income research for Prescott, Ball & Turben. Three years ago, he notes,
rates hovered at 13.5 percent, whereas a hospital issue today can be as low as between 4 percent and 5
"Lower interest rates make fixed rate issues more attractive," which is why fixed-rate
issues comprised 69.1 percent or $3.15 billion of all hospital revenue bonds during the first half of
this year, Schmitt explains. Variable or "put" option bonds made up the remaining $1.41 billion,
according to preliminary estimates from Prescott, Ball & Turben.
"bond insurance is way up this year," Schmitt says. Bond insurance and various forms of credit enhancement
often allow a hospital better interest on a tax-exempt
issue. Issues carrying bond insurance represented $2.61 in volume or 57.2 percent of all hospital revenue
bonds during the first half of this year, he says.
estimates that there were more tax-exempt
bond issues floated on behalf of freestanding hospitals than on behalf of multihospital chains or
consortiums during the first half, probably because many freestandings have new capital needs right now.
Schmitt is editor of Prescott, Ball & Turben's newsletter, Health Care