Subprime Slime's Halo Effect
Since the markets got collectively nervous about the rising risk of defaults in the credit markets about three weeks ago, every pundit in the land has been wondering how far the contagion will spread. It's still too soon to know, but that doesn't keep everyone from speculating--and repricing risk in the meantime.
Thanks largely to the fact that banks and mortgage brokers granted loans to just about anyone who could put an "X" in the signature blank (Documentation? We don't need no stinking documentation!), other borrowers--even those with stellar credit--have been painted with a broad brush. As we know from rudimentary economics, it's often not the actual risk that concerns people when fear hits the market, it's the perception of risk. As a result, the credit markets have tightened significantly for borrowers of any type, thanks to the fact that folks who never should have qualified for such huge home loans in the first place are predictably starting to default. As of now, anything in need of financing is getting a much harder look than perhaps is warranted. Markets overcorrect on the upside as well as the downside.
But this, too, shall pass.
One wonders, however, how much healthcare borrowers are going to have to pay, in terms of risk premiums, for the mistakes of others. On one hand, says Jeffrey A. Davis, chairman of Cambridge Realty Capital Companies, a lender that focuses on healthcare, the upturn in long-term bond yields means health borrowers should be concerned about interest rate volatility--10-year treasuries have risen 300 basis points in the last month or so--especially if they have variable-rate debt.
So similar forces that caused the subprime meltdown--adjustable-rate mortgages with low introductory rates that reset after two years--also show up in variable-rate debt that many healthcare companies and hospitals carry. "We've consistently urged our clients to review their debts and, when possible, to move from variable to fixed-rate financing," Davis said in a press release about two weeks ago. Doing so is a way to achieve some future cost certainty with debt service in a highly uncertain lending environment.
There is a bright side. Despite inflation concerns and an economy that seems to be humming along in most sectors not financial, the Federal Reserve Board has no leeway to raise interest rates, a non-move that in theory extends historically cheap borrowing ability for strong healthcare credits. The Fed held rates steady at 5.25 percent after last Tuesday's meeting, a level it's maintained since June 2006. Though the Fed probably won't cut anytime soon and though the best of times seem to be behind us, pretty good times may still be ahead for quite a while.
That's because should the economy worsen in the coming months, the Fed may have to cut rates, perhaps reopening the doors for--dare we say it--cheaper debt rates on the horizon.
Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at email@example.com.
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