Rates have moved higher but remain compelling. No change in the debt issuance playbook: tilt toward long-duration fixed-rate issuance on a tax-exempt basis if supporting projects are available. Five-year and shorter rates are amazing, so there is appeal to the idea of taking on capital structure risk. But total curve spreads remain below historical averages and the return on risk needs to be carefully considered before moving away from long-duration fixed-rate strategies. Every option is compelling, so setting priorities and determining what defines success is the first critical step to a successful financing.

1 Year

5 Year

10 Year

30 Year

Oct. 8 – Treasury

0.10%

1.05%

1.61%

2.16%

v. Sept. 24

+2 bps

+9 bps

+15 bps

+17 bps

Oct. 8 – MMD*

0.13%

0.52%

1.18%

1.69%

v. Sept. 24

+2 bps

+8 bps

+18 bps

+10 bps

Oct. 8 – MMD/UST

130.00%

49.52%

73.29%

78.24%

v. Sept. 24

-7.5%

+3.7%

+4.8%

-1.7%

*Note: MMD assumes 5.00% coupon

SIFMA reset this week at 0.05%, which is approximately 60% of 1-Month LIBOR and represents a 3 basis point adjustment versus the September 22 reset.

Operations vs. Balance Sheet

Our virtual Healthcare Leadership Conference is scheduled for Thursday, October 14, from 10:00 a.m. – 2:00 p.m. Central Time. The agenda includes four sessions covering a range of important topics addressed by a diverse set of healthcare leaders. One of the four will be an extension of the running conversation that my colleague Terri Wareham and I have had over the past 18 months with Lisa Goldstein from Moody’s, Kevin Holloran from Fitch, and Suzie Desai from S&P Global. This will be another very informative discussion and we hope you can join us. The whole conference will be terrific and if you have not registered, you can do so here.

One of the threads we will continue to test with the rating agency panel is the idea of operations as the major volatility driver (on both the revenue and expense sides) versus balance sheet as the resiliency anchor. This has been the defining COVID dynamic, and we expect that it will remain important up to the very end of the stabilization process. A central management challenge is that the two inputs—operations and balance sheet—will change, which means that the relationship between them (which might be thought of as almost a net resiliency position) will change as well. The related complicator is uncertainty as to whether any changes are permanent, transitory, or something in between.

The central operating question is whether we are experiencing transitory or a structural margin realignment. On the revenue side, the question is based on whether volumes have fundamentally reset to lower levels or—even if there is a recovery in “total activity”—whether meaningful portions will come in through lower reimbursement settings? Given constraints on the ability to move prices higher, any sustained debasing of volumes will drive margin deterioration. On the expense side, the question focuses on both the supply of labor (up and down the entire care delivery chain) and the likelihood that shortages will drive increased labor unit costs. The prevailing labor scarcity is suggesting margin pressures by both impeding the ability to process volume and create revenue and increasing the cost associated with generating the revenue. If the early COVID hope or expectation was that these pressures would be transitory, the emerging concern is that they will prove to be structural.

The transitory versus structural debate carries over to the balance sheet. Here, the primary question is what does the Federal Reserve do next, and will it make healthcare resiliency resources—unrestricted cash and investments—more volatile? One of the outcomes of the Fed’s late September meeting was a change in the “dot plot,” which captures the Federal Open Market Committee members’ expectations about the forward path of the federal funds rate. The “news” was an equal distribution between nine members who expect no rate increase in 2022 versus nine that expect an increase (with six expecting a 25 basis point increase and three expecting a 50 basis point total move). This is a noteworthy shift in member sentiment, and it seems driven by concerns that inflation pressures are not transitory. An interesting connecting thought was noted in an October 2 “Streetwise” column in the Wall Street Journal, where James Mackintosh suggested headwinds for markets (share prices, volatility, returns) if the Fed and other central banks are forced to raise rates because they are more concerned about containing inflation than they are about responding to slowing economic growth. Mr. Mackintosh’s point seemed to be that while we have seen Fed rate hikes since 2009, we haven’t seen a situation where tightening was paired with slowing growth or done in response to a negative force like inflation. This is not a predictor of higher rates, but it does identify a new thing to add to the “haven’t done that before” list that stands between today and normal.

Treasury and Capital Markets chart

Figure 1 – FOMC participants’ assessments of appropriate monetary policy: Midpoint of target range or target level for the federal funds rate. Federal Open Market Committee, Summary of Economic Projections, Sept. 22, 2021

Unrestricted cash and investments will retain their primary resiliency role, even if returns on those resources become less reliable. But falling or even more volatile non-operating returns will underscore healthcare income statement vulnerability, which may change the idea of how much balance sheet is sufficient to defend a credit position, fund capital, support strategic transformations, and do the myriad other things needed to get through and beyond COVID. We entered March 2020 with a still very accommodative monetary position; since that time, the Fed has gone to a whole new level by blasting almost unimaginable amounts of liquidity into the system. For healthcare providers, this has created an environment in which their critical resiliency anchor has also contributed exceptional returns. This dynamic may be transitioning. What we don’t know is what any such shift might mean for the balance among risk, return, and resiliency; but what we do know is that having an effective resource allocation framework in place is the best way to help guide your organization back to a balanced position. It really is all about resource management.

Please stay healthy and safe and reach out to me by email ejordahl@kaufmanhall.com or phone at (224) 724-3134 with questions or if we can help in any way.

Meet the Author
ericjordahl.png
Image
eric-jordahl

Eric Jordahl

Managing Director
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.
Learn More About Eric