The financial services industry is currently undergoing one of the largest retrenchments in recent memory, and despite its general reputation as one of the safest investments in times of uncertainty, healthcare—and especially hospitals—has felt the effects of the financial meltdown. But what's next?
Large investment banks that generally pull together the necessary steps to issue municipal bonds, a key source of funding for nonprofit hospitals, face less competition than they once did, with Bear Stearns being absorbed by JPMorgan and UBS exiting the market entirely, says Arlan Dohrmann, managing director at Stern Brothers & Co.'s National Healthcare Finance Group. That means issuing debt is likely to get more expensive. Second, banks in general are getting stingier with lending, meaning letters of credit are becoming tougher to get—there's less capital available, Dohrmann says. "They've used up a lot of capacity, so they will be more selective. Margins for even best credits have gone up—in some cases double what they were charging a year ago."
That's not to mention that the credibility of bond insurers like MBIA and Ambac, just to name two, is in tatters thanks to implosions outside healthcare that have damaged their ability to actually insure any type of debt in the event of a default.
"Years ago, bond insurance was a good way to protect yourself from a rating downgrade," says Dohrmann. "But it's so damaged that we could end up with very few insurers or maybe none."
In any case, the recent return of risk to the marketplace means fundamentals once again hold sway over the debt markets, and in the long term, that's healthy, Dohrmann says. "I still think it boils down to the fundamentals," he says. "How much debt capacity do you really have?"