Hospital debt risk grows along with demand

Hospital debt is in greater demand due to the higher yields they offer over taxpayer-backed bonds, but it also presents higher risks, reported The Wall Street Journal.

The demand for higher-yielding debt has prodded hospitals to guarantee fewer protections in the bond issues to drive up yields. As a result, the risk is significantly higher: Hospital bonds default at a rate about 10 times higher than public debt such as municipal bonds, according to Municipal Market Advisors, the Journal noted.

However, the Bank of America Merrill Lynch index reported that hospital debt had yields averaging 8 percent in 2012, compared 5.6 percent for the overall municipal bond market, the Journal said.

An example of this risk taking could be illustrated by a recent $66 million issue by the Kennedy Health System in New Jersey to refinance existing debt. Unlike the prior bond issue, Kennedy is not carrying a backup reserve of funds to repay the debt, according to the Journal. The bonds sold briskly anyway.

The desire for hospital debt comes despite a recent Moody's Investors Service report cautioning that ratings downgrades for non-profit facilities are expected to outstrip upgrades for the foreseeable future, Reuters reported.

For more:
- read the Wall Street Journal article (subscription required)
- read the Reuters article

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