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.

We are stepping into 2021’s new issue supply season. After a long stretch of more modest issuance, the fourth quarter will showcase higher activity. Whether in response to supply pressures or other factors, the market tone is transitioning from what we experienced over most of the year. The buyer dynamic seems tighter, which requires paying attention to three things: the potential that aggregate investor participation (and order subscription levels) may be less robust; the importance of marketing and investor engagement; and the need to be thoughtful about how to initiate and then move through the price discovery process.


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*Note: MMD assumes 5.00% coupon

SIFMA reset this week at 0.05%, which is approximately 56.02% of 1-Month LIBOR and represents no adjustment versus the October 6 reset.

Virtual Healthcare Leadership Conference

We held our virtual Healthcare Leadership Conference last Thursday, October 14. Four very interesting sessions, including our latest rating agency panel conversation. We covered a lot of ground, checking in on what the agencies are seeing in terms of rating activity, what they are interested in discussing, and what some of the key considerations are across income statements and balance sheets. Common threads seemed to be an expectation that ripple disruptions from COVID will be with us for an extended period; operations—particularly expenses—will continue to be a major credit headwind; and balance sheets will remain a resiliency anchor. It was a good conversation that you can access here.

The Transition to Higher Rates

I consulted my Magic 8 Ball this morning about whether interest rates are heading higher and got the “Signs point to yes” response, which is a shift from the “Reply hazy try again” reading I got in each of the past few months. The idea of higher rates reflects growing expectations that the Federal Reserve will adopt a less accommodative approach to both quantitative easing (intervention in the long end of the market) and the Fed Funds Rate (management of the short end of the market).

The next question I put to my portable oracle was, “How will markets react to Fed tightening?” The answer I got back was “You tell me,” which I don’t think is on the Mattel list of authorized responses. But the 8 Ball was just being honest: Fed policy responses first to the credit crisis and then to COVID have put us in a place that has never been experienced in the history of modern finance and there is no road map out, partly because no one knows where we are supposed to go.

While I don’t have an answer to the “how will markets respond” question, I can do nuance better than the Magic 8 Ball and can offer up some things to think about:

  • Emerging from COVID into a world of supply chain and labor disruptions will magnify the tension between the Fed’s full employment and price stability mandates; the degree of disruption during a transition to higher rates will reflect how strongly capital market participants align with what the Fed does (its mandate prioritization) and when it does it. A further complicator is Federal Reserve Chairman event risk (current Chair Jerome Powell’s term ends in February 2022) and what that might mean to both policy continuity and to the idea of the central bank as an independent institution.
  • A useful distinction may prove to be whether the Fed’s actions get characterized as “monetary reaction” or “monetary management.” Monetary management suggests the Fed is in front of events and that its actions are helping to shape market expectations and sentiment. Monetary reaction implies the Fed is behind and must act more aggressively in response to a negative event (e.g., inflation), because it spent too long trying to accommodate the other mandate (e.g., supporting post-COVID economic growth).
  • Markets respond better to monetary management. An important risk is the potential types and levels of disruption if we start tilting to the wrong end of the reaction-management continuum.
  • Marginally higher rates will produce another cash flow stress, but one that is probably less severe than things like volume and labor disruptions; in fact, many healthcare organizations have moved to predominantly fixed rate structures (natural plus synthetic) and will either be indifferent to higher rates or will benefit from improvements in contingent liabilities like swap marks or pension liabilities.
  • The dynamic since COVID started has set balance sheets as the return, credit, and risk counterpoint to stressed operations; balance sheets have been the resiliency anchor.
  • Financial asset dislocation—especially when paired with sustained pressures on operations—might introduce a tipping point in the level of financial stress that could change ratings, disrupt capital spending, or impede strategic initiatives.

Hopefully, we are a long way from the worst sort of financial asset dislocation scenario and the Fed has options between here and there. But that reality is almost secondary; what matters is that healthcare operations are likely to remain dislocated and may get worse, which means that healthcare balance sheets will continue to confront their own dual mandate tension between generating resilience (offsetting risk) and driving independent return. Healthcare executives face the same challenge as the Fed: to navigate from here to whatever is at the end of all this will require that they get their dual mandate priorities right at each juncture. Holistic balance sheet management is one of the most important things your organization should be doing right now.

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

Meet the Author

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.
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