Be Careful Out There

4 minute
Stethoscope and expense chart

The borrowing environment remains challenging given sharply higher benchmark rates and continued pressure on credit spreads. Volatility is defining every capital market. Different taxable public offerings over the past two weeks had materially different outcomes in terms of investor engagement and ultimate price. Credit specifics are critical.


1 Year

5 Year

10 Year

30 Year

 May 6 – Treasury





v. April 22





May 6 – MMD*





v. April 22





May 6 – MMD/UST





v. April 22





*Note: MMD assumes 5.00% coupon

SIFMA reset this week at 0.60%, which is approximately 71.25% of 1-Month LIBOR and represents a 14 basis point adjustment versus the April 20 reset.

The Times They Are a-Changin’

Two cultural references frame the moment: Bob Dylan’s 1964 “The Times They Are a-Changin’” pairs with Sergeant Esterhaus’s weekly “Let’s be careful out there” admonition on the 1980s TV show Hill Street Blues. Things are changing and it’s getting rough, so caution is the word:

  1. Credit Positioning: First quarter margin performance was weak, driven by challenges across utilization, revenues, and expenses. Kaufman Hall’s National Hospital Flash Report indicated signs of margin “improvement” over the course of the quarter, but losses remained the norm and challenges are expected to continue. Adjusted expenses continue to run well above 2021 and 2020 levels and a material share of these increases reflects a structural cost reset that will be difficult to address. If these trends are leading indicators, the industry will likely have to claw its way back to profitability. Utilization/revenue micro-disruptions will offer lingering margin volatility, and credit pressures will continue to escalate.
  2. Market Conditions: Benchmark rates continue rising in anticipation of the Federal Reserve actions that will be required to corral inflation; at the same time, over the past two weeks credit spreads widened sharply, with at least some of this being attributed to investor concerns about the impact those rate increases will have on U.S. economic performance. This “benchmark versus credit spread” dynamic reflects a tension between the bookend outcomes of the Fed’s “soft landing” versus stagflation that shows up in what I like to call the Marx Brothers syndrome. In the 1933 movie Duck Soup, Chico Marx—doing his best Groucho imitation—asks a question for the ages: “Who are you going to believe, me or your own eyes?” This frames the central market tension point: do you believe the Fed narrative around the data, or do you believe the data? A big part of prevailing market volatility seems to be market participants bouncing between these two extremes. On Wednesday, markets soar in response to Jerome Powell’s post-Fed meeting comments, and on Thursday, they take it all back and then some as additional commentary (this time from the Bank of England) reaffirms the hard road ahead. A discouraging thought is that we are early in the rebalancing process; even after Wednesday’s 50 basis point move, rates remain very low, the Fed balance sheet remains massive, and we are a long way from markets that aren’t going to be whipsawed by Fed policy.
  3. Liquidity: During 2020 and 2021, the Fed’s unconstrained commitment to liquidity produced unprecedented access to cheap credit. As the Fed first responded to the COVID crisis, the best access was concentrated with “AA” credits, but eventually there was so much liquidity sloshing around that every issuer in every market was able to join the party. In response to the changing rate regime, dollars are flowing out of fixed income which, in turn, is making bond buyers more selective on credit and more defensive on yield. More difficult to track is the impact all this is having on the net dollars available to healthcare borrowers. As investment resources get lean and healthcare credit gets tight, the tracking questions will include how big are the anchor capital pools for healthcare and what will it take on credit spread to get the on-the-margin buyers to participate? And, if the scale and composition of the traditional buyer base is changing, are there other funding channels that offer better execution?

The message remains: there is no haven; the operating, financing, and investing activities of every not-for-profit healthcare organization are facing significant headwinds that may be in place for an extended period. Rate and spread pressures will create challenges until (i) markets navigate the inflation/growth tension and dollars start coming back into fixed income, and (ii) the healthcare sector finds a credit level that is stable enough to capture a good share of the total available fixed income investment resources. While all this is playing out, it will be important to continuously reassess what type of external capital you should access and how you should access it:

  • What is the priority between cost, risk, and flexibility in making funding choices?
  • Is long-term debt the best option or are there other capital channels that offer a better solution?
  • Is tax-exempt debt an option and does it offer an acceptable alternative given the associated tax and structuring limitations?
  • Do public markets offer the best execution, or should private options be considered or pursued?
  • Is long duration fixed rate debt still the best option or do risk products and strategies offer a better cost, risk, and flexibility profile?

At best, the credit challenges confronting the healthcare sector will pair with a Fed soft landing and only modest capital structure dislocation. At worst, the credit challenges will pair with stagflation, or some other form of hard landing, and a more toxic combination of operating and balance sheet stress. Either way, the work required is the same: reassess your circumstances and your resulting credit and capital structure thesis, outline and prioritize your options, and refine your implementation road map.

Trending in Healthcare Treasury and Capital Markets is a biweekly blog providing updates on changes in the capital markets and insights on the implications of industry trends for Treasury operations, authored by Kaufman Hall Managing Director Eric Jordahl.

Eric Jordahl directs Kaufman Hall’s Treasury and Capital Markets practice and focuses on helping healthcare organizations nationwide by providing Treasury-related transactional, strategic, and management support across all financial assets and liabilities.
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